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A Beginner’s Guide to Tax Evasion, Money Laundering and Other Criminal Tax Related Crimes

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An individual involved in a criminal tax investigation may find himself or herself ultimately charged with specific offenses (contained in the Internal Revenue Code) and with general federal criminal offenses. The tendency in criminal tax prosecutions is to pile up charges, indicting the targeted individual for multiple years with a combination of offenses contained in the Internal Revenue Code and other federal criminal offenses as the situation warrants. Anyone under investigation for tax evasion or a tax crime should understand something about commonly prosecuted crimes that may result from such an investigation. A defense to one charge may be no defense to another, which is one reason for piling up charges against individuals targeted by the Internal Revenue Service (“IRS”) and the United States Department of Justice. We will begin this article with a discussion of selected Internal Revenue Code offenses which often come into play in a criminal tax investigation and then complete this article with a couple of select federal criminal offenses. We will not attempt to analyze fully all of these criminal offenses but rather concentrate on their interrelationship with each other during a criminal tax investigation and prosecution.

Tax Evasion

Probably the most common sanction the IRS investigates individual taxpayers for can be found under Section 7201 of the Internal Revenue Code. This criminal section defines what is commonly known as “tax evasion” or “tax fraud.” It reads as follows:

Any person who willfully attempts in any manner to evade or defeat any tax imposed by the Internal Revenue Code or the payment thereof shall, in addition to other penalties provided by the law, be guilty of a felony and, upon conviction, shall be fined not more than $250,000 ($500,000 in the case of an organization) and/or imprisoned no more than 5 years. The elements of tax evasion are as follows: 1) a person owes more federal income tax than was declared due on his or her federal tax return; 2) the person knew that more federal income tax was owed than was declared on his or her income tax return; 3) the person made an affirmative attempt to evade or defeat any income tax; and 4) the person willfully attempted to evade or defeat income tax.

On its face, this is an extremely broad criminal statute. It reaches “any person,” “any tax” and “any manner” of evasion. It is not restricted to income taxes; successful prosecutions have involved evasion of gift tax, estate tax, and withholding taxes. It is not restricted to the individual filing his or her income tax returns but has included, under the definition of “any person,” one spouse evading the taxes of another spouse, corporate officers evading withholding tax, administrators of estates evading the estate tax, and attorneys, accountants or bookkeepers who aid in the filing of tax returns which defeats “any tax.” An attempt to evade taxes or tax evasion constitutes a separate offense for each tax year. Federal prosecutors typically will charge an individual with multiple counts, usually encompassing three or more years, because it is easier to demonstrate a pattern of understatement and to negate claims of negligence or mistake. However, there have been many successful prosecutions of tax evasion involving only one year.

The usual formulation of the elements of a tax evasion offense are: 1) the defendant committed an affirmative act to defeat or evade tax. 2) there is a material amount of tax due and owing; and 3) the defendant acted willfully.

The Defendant Attempted to Defeat or Evade Tax and Material Amount of Tax Due

This element, as discussed above, includes all forms of federal tax, not merely income tax. This element, however, distinguishes violations of Section 7201 from other Internal Revenue Code violations in that it requires the IRS to prove a deficiency in the payment of tax. The IRS is not required to prove the exact amount of tax due, however, the IRS must prove that there was a “substantial deficiency” in taxes that were not paid.

Defenses to Tax Evasion

Unlike most criminal offenses, ignorance or a good faith misunderstanding of the law constitutes a defense to tax evasion. In a tax evasion case, the IRS and the prosecution is required to prove that an individual “willfully” evaded the payment of tax. Ignorance or mistake of law may be a defense to a charge of tax evasion.

Willfulness requires the IRS and prosecution to prove that the law imposed a duty on an individual accused of tax evasion and that the individual knew of this duty, and that he or she voluntarily and intentionally violated that duty. Willfulness is a state of mind. In all but the rarest of circumstances, an individual’s state of mind can only be demonstrated by objective facts from which the individual’s state of mind can be inferred.

A frequent defense associated with a defense that an individual did not willfully evade the payment of taxes in a good faith reliance on a professional tax advisor. This defense requires that the defendant provide his or her tax advisor with all necessary information and follow the advice received from the tax professional. A defendant can also challenge a tax evasion charge by offering evidence that he or she did not owe taxes for the periods the IRS claims. This can be done by the individual stating that he or she did not claim deductions he or she was entitled to claim. An individual can also provide evidence that the funds that the IRS claims is taxable is the nontaxable return of capital as opposed to a taxable dividend.

False or Fraudulent Returns or Statements

Whenever an individual is criminally investigated by the IRS for tax evasion, the individual runs the risk of being charged with the filing of false tax returns.

Under Internal Revenue Code Section 7206(1), any person who willfully signs and files any return, statement, or other document containing a declaration that it is made under the penalties of perjury, and that the person does not believe to be true and correct as to every material matter, is guilty of a felony and subject to a fine of not more than $100,000 (not more than $500,000 for corporations) and/or imprisonment of up to three years, along with costs of prosecution.

The elements of this offense are:

1) The return, statement, or other document contained false information with respect to a material matter;

2) The defendant made and signed a return, statement, or other document that contained a written declaration that it was being signed subject to the penalties of perjury;

3) The defendant did not believe that the material matter was true and correct; and

4) The defendant acted willfully.

The defenses to the filing of false tax returns are similar to tax evasion. Section 7206 has been used in lieu of Section 7201 when a specific item on a tax return is false but results in little or no income tax liability. The presence or absence of a tax liability is not relevant to a charge of filing a false tax return. The lack of a tax deficiency may however become relevant to the extent that it demonstrates lack of intent to defraud the IRS or willfulness to evade paying taxes. For example, suppose an individual failed to report income on a Schedule C of a tax return because his business income and expense were a virtual wash. The lack of a tax liability would be relevant in demonstrating that this individual did not intend to file a false tax return.

Money Laundering

Individuals charged with tax evasions are also often charged with money laundering. Money laundering is a significant offense and generally involves the defendant disguising or otherwise concealing the origins, sources, or nature of money that has been obtained from illicit or illegal activities, such as drug trafficking. The federal crime of money laundering does not arise under the Internal Revenue Code and, instead, arises primarily under Sections 1956 and 1957 of Title 18 of the U.S. Code.

The crime arising under Section 1956 requires the defendant to conduct or attempt to conduct a financial transaction, knowing that the property involved in the transaction represents the proceeds of some unlawful activity, and the property was in fact derived from a specified unlawful activity. The defendant must also have acted with “specific intent,” which means that the prosecution has to prove that the defendant acted with one of the following mental states: 1) the intent to promote the carrying on of a specified unlawful activity; 2) the intent to engage in tax evasion or tax fraud; 3) the knowledge that the transaction was designed to conceal or disguise the nature, location, source, ownership, or control of proceeds of the specified unlawful activity; or 4) the knowledge that the transaction was designed to avoid a transaction reporting requirement under state or federal law. Anyone convicted of money laundering under Section 1956 could be sentenced up to 20 years in prison and fined up to $500,000 or twice the value of the property that was involved in the transaction, whichever amount is greater.

By contrast, the crime arising under Section 1957 (the so-called “spending” money laundering statute) does not require specific intent on the part of the defendant; rather, its required mental state is only knowledge, namely, that the defendant knowingly conducted a monetary transaction in criminally derived property in an amount greater than $10,000. 18 U.S.C. Section 1957 prohibits a defendant from knowingly conducting a monetary transaction in criminally derived property in an amount greater than $10,000 where the amount is in fact proceeds of a specified unlawful activity. In a 1957 case, a prosecutor must prove that the defendant conducted a monetary transaction over $10,000 through a financial institution. Section 1957 generally defines a monetary transaction as a deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument by, through, or to a financial institution. Section 1957 carries a maximum penalty of 10 years in prison and maximum fine of $250,000 or twice the value of the transaction.

The statute of limitations for money laundering is 5 years and begins to run when the defendant initiates the financial transaction at issue. However, the statute of limitations for money laundering can be significantly extended if a conspiracy is also alleged. As we have noted to you in our prior discussions, the statute of limitations under a conspiracy theory generally begins to run on the date on which the last overt act committed in furtherance of the conspiracy took place. The money laundering conspiracy provision in Section 1956(h) does not require proof of an overt act. Thus, the statute of limitations period for a conspiracy that does not allege an overt act continues for as long as the prosecution alleges and proves that the conspiracy’s “purpose has neither been abandoned nor accomplished, and no affirmative showing has been made that it has terminated.” See United States v. Seher, 562 1344, 1344 (11th Cir. 2009). 

Even if an individual has a valid statute of limitations defense for the crime of money laundering, an individual under investigation for money laundering could still be charged with the separate crime of conspiracy to commit money laundering. The statute of limitations period for the conspiracy to commit money laundering can be significantly longer than the one for money laundering. In this context, the act of concealment by one-conspirator may resurrect a conspiracy to commit “concealment” money laundering and bring a conspiracy count within the applicable statute of limitations if the prosecution can establish that the subsequent acts of concealment by a co-conspirator were both foreseeable and in furtherance of the charged conspiracy. Moreover, if the alleged object of a conspiracy is “economic” (money laundering conspiracies having been generally deemed to be such), the conspiracy would continue for the purpose of the statute of limitations until the conspirators “receive their anticipated economic benefits.”

Wire Fraud

Another financial crime that an individual under investigation for tax evasion may be charged with is wire fraud, which is defined in 18 U.S.C. Section 1343 as follows:

Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency […], or affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

A prosecutor may file wire fraud charges if there are multiple fraudulent tax returns filed or if promoters of a fraudulent tax shelter are involved in a tax evasion case. A prosecutor may also approve wire fraud charges in cases that involve schemes to defraud the IRS if there was a large fraud loss. The statute of limitations for the crime of wire fraud is 5 years and, in the case of a conspiracy to commit wire fraud, begins to run from the date of the last overt act committed in furtherance of the conspiracy.

In order for a defendant to be convicted of wire fraud charges, the prosecution must prove that the defendant intentionally used some kind of electronic communication, such as a phone or email, for purposes of committing a fraud. The elements of wire fraud are as follows:

1) Scheme or artifice to defraud. This element requires the prosecution to prove that there was a scheme or plan to cheat somebody of money or something else that has value.

2) Scheme involved false representations that were material. The prosecution has to prove that false statements were made and material, which means the statements were capable of influencing someone.

3) Intent to defraud. This requires the prosecution to prove that the false statements were made with the purpose to deceive, and not for some other purpose.

4) Wire transmission in interstate or foreign commerce. This requires the prosecution to prove use of an interstate wire. Interstate wire includes the internet or telephone.

Under these elements, in addition to the reasons discussed above, prosecutors can also indict individuals under a theory of wire fraud for any telephone calls, emails, or text messages sent in connection with funds being transferred to undeclared foreign financial accounts.

Conclusion

Winning or losing a criminal tax evasion case will depend to a large extent on the actual facts of any particular case. Nevertheless, this is one of the few areas of the criminal law where the most vital and damaging facts are consistently developed from the defendant himself, because he or she may make statements or deliver records or offers early and weak defenses. This may invariably result in the IRS being able to pull together various inferences, assumptions, and presumptions which can ultimately result in the IRS successfully building a criminal tax case against a targeted individual. If you are being investigated by the IRS it is extremely important to retain a highly qualified tax attorney to represent you as early as possible.

Anthony Diosdi has more than 20 years of experience representing closely held businesses and individuals in civil and criminal controversy matters. Hei has represented individuals accused of tax evasion and other tax related crimes by the IRS and the United States Attorney both pre and post indictment.

Anthony Diosdi is admitted to the California and Florida bars.

Diosdi & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.

Anthony Diosdi

Written By Anthony Diosdi

Partner

Anthony Diosdi focuses his practice on international inbound and outbound tax planning for high net worth individuals, multinational companies, and a number of Fortune 500 companies.

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