By Anthony Diosdi
An individual targeted by an Internal Revenue Service (“IRS”) criminal tax fraud investigation may find himself charged with specific revenue offenses (contained in Title 26 of the Internal Revenue Code) and with general federal criminal offenses (contained in Title 18). There is a tendency in criminal tax prosecutions to pile up charges and indict an individual for multiple years with a combination of revenue offenses and general federal criminal offenses as the situation warrants. For anyone involved in an IRS criminal tax fraud investigation, it is necessary to know something about revenue criminal offenses and Title 18 offenses that have been traditionally involved in criminal income tax cases. This is because a defense to one may be no defense to another, which is the main reason for piling up charges against individuals targeted in a criminal tax fraud investigation.
This article will begin with a review of revenue offenses that are typically charged in criminal tax fraud cases. We will then complete this discussion with a review of selected Title 18 offenses which often come into play in a criminal tax fraud case. This article will not attempt to analyze fully all of the criminal offenses which could be the subject of a criminal fraud investigation. Instead, this article will concentrate on their interrelationship in the context of a criminal tax prosecution for tax fraud.
Attempt to Evade and Defeat Tax or “Tax Evasion”
We will begin our discussion of the possibly the most commonly charged tax offense in a criminal tax fraud investigation. Internal Revenue Code Section 7201 defines what is commonly known as “tax evasion” or “tax fraud.” Section 7201 reads as follows:
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, shall be fined not more than $250,000 ($500,000 for corporations) and/or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Tax evasion is an extremely broad criminal statute. The statute reaches “any person,” “any tax” and “any manner” and the statute is not restricted to income tax. There have been successful criminal prosecutions involving the evasions of gift, estate, excise tax, and withholding tax. The crime of tax evasion is not restricted to the taxpayer filing his or her individual income tax returns. Section 7201 of the Internal Revenue Code includes within its definition “any person” such as a spouse evading the taxes of another spouse, corporate officers evading corporate tax, administrators of estates evading estate taxes, and attorneys, accountants or bookkeepers who assist their clients in evading taxes.
An attempt to evade income taxes constitutes a separate offense for each year. Traditionally, these prosecutions involve charges for counts for multiple years.
To establish the crime of tax evasion, the IRS must prove “beyond a reasonable doubt” that an individual failed to report his or her correct tax liability. The problem is the Internal Revenue Code or any other Code does not define ‘reasonable doubt.’ The expression “beyond a reasonable doubt” is often discussed, but commonly misunderstood. Perhaps the most famous definition of “beyond a reasonable doubt” is that of Shaw, C.J., instructing the jury in Commonwealth v. Webster, 59 Mass. 295, 5 Cush. 295, 320, 52 Am.Dec. 711 (Mass.1950): “[R]easonable doubt* * * is a term often used, probably pretty well understood, but not easily defined. It is not a mere possible doubt; because everything relating to human affairs, and depending on moral evidence is open to some possible or imaginary doubt. It is that state of the case, which, after the entire comparison and consideration of all the evidence, leaves the minds of the jurors in that condition that they cannot say they feel an abiding conviction, to a moral certainty, of the truth of the charge.”
In a tax evasion case, the IRS must establish that “beyond a reasonable doubt” that the defendant owed an “additional tax” and the amount of tax evaded was substantial. The term “substantial” has not been defined by the Internal Revenue Code or its regulations. However, a number of cases has stated:
“The showing by the government must warrant the findings that the amount of tax evaded is substantial * * * but this is not measured in terms of gross or net income, not by any particular percentage of the tax shown to be due and payable. All the attendant circumstances must be taken into consideration….but a few thousand dollars of omissions of taxable income may in a given case warrant criminal prosecution, depending upon the circumstances of the particular case. Otherwise the rich and powerful could evade the income tax law with impunity.”
Finally, in order to be convicted of tax evasion, the defendant must have “willfully” attempted to evade or defeat a tax. On a number of occasions, willfulness in tax evasion cases has been defined as requiring an “evil motive,” “bad faith,” “deliberate and not accidental” or an act done “with specific intent.” A good way to understand willfulness in the context of a criminal tax case case would be to review the definition of “willfulness” in a jury instruction for a tax evasion case. A jury instruction defining willfulness may read as follows:
Willfulness is an essential element of the crime of attempting to evade or defeat the income tax laws as charged in the indictment. An act is done “willfully” if done purposely with the specific intent to disregard the law, or to do that which the law forbids. The word “willfully” as used in connection with this offense means with a bad or evil purpose of evading a known tax obligation in order to defraud the Government of that tax.
Defendant’s acts in connection with his income tax are not “willful” if they are done through inadvertance, carelessness or honest misunderstanding of what the law required, or as a result of his good faith reliance on an employee or a consultant to whom he gave all information necessary to prepare a correct tax return.
Willfulness may be inferred from all of the facts and circumstances, including the exhibits. In determining whether the defendant acted willfully, the jury may consider, along with other evidence in the case, the defendant’s prior and subsequent acts relating to his income tax obligations. Such evidence may indicate whether he was acting in good faith or whether he intended to evade the law. See Seventh Circuit Judicial Conference Committee on Jury Instructions, LaBuy, Manual on Jury Instructions in Federal Criminal Cases, Pt. II, 36 F.R.D. 457 Section 13.02-2 at 555 (1963).
The above jury instruction demonstrates that “willfulness” is a state of mind. In all but the rarest of circumstances can an individual’s state of mind be demonstrated by objective facts from which his state of mind can be inferred. The United States Supreme Court has held that willfulness “must be proven by independent evidence and…cannot be inferred from the mere understatement of income.” See Holland v. United States, 348 U.S. 121, 139 (1954). Nevertheless, Holland also held that willfulness could be inferred from a “consistent pattern of underreporting large amounts of income.” Willfulness can also be proved by a variety of acts. Examples of such acts are a double set of books; the making of false invoices or documents; the destruction of books and records; inconsistent records of receipt and obliterated entries; or acts to “cover up” transactions and conceal income. If the IRS demonstrates any of the above for purposes of “willfulness” in a tax evasion case, the accused must be ready to establish the failure to report income on a tax return was due to inadvertence, mistake, good faith reliance on a professional or negligence. Failure to do so can have disastrous consequences.
The statute of limitations should always be considered in any criminal tax cases as a defense. As a general rule, tax evasion is subject to a six year period of limitations. The statute of limitations for tax evasion return begins with “the commission of the offense.” In the case of tax evasion, a prosecution may be started more than six years after a tax return was filed or required to be filed. For the offense of attempting to evade or defeat payment of tax, the statute of limitations does not begin to run until the last date of the conduct making up the attempt. On this authority, the IRS has successfully argued that a continued course of conduct can exist extending the statute of limitations for criminal prosecution well beyond the ordinary expiration of the statute of limitations. This is illustrated in United States v. Shorter, 809 F.2d 54 (DC Cir.), cert denied. 1085 S. Ct. 71 (1987) and United States v. Feldman, 731 F. Supp. 1189 (SDNY 1990). In Shorter, the defendant was charged with twelve counts of willfully attempting to evade payment of income taxes from 1972 through 1983. The defendant was convicted on a charge of a continuous offense properly chargeable in a single count. In Feldman, a federal district court held that there was an ongoing course of fraudulent count, and for purposes of a tax crime, the statute of limitations on criminal prosecution did not begin to run until the entirety of that conduct was complete.
Shorter and Feldman indicate that determining when the statute of limitations begins to run and ends is tricky and often a moving target. It is always best to have a criminal tax attorney carefully review the facts and circumstances in any alleged criminal tax evasion case.
Filing a False and Fraudulent Return
The next most frequently charged crime in the tax fraud regime is the filing of a false and fraudulent tax return or the filing of a false tax return. Internal Revenue Code Section 7206(1) defines the filing of a false and fraudulent return as:
Any person who-
(1) Declaration under Penalties of Perjury. Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or ….
In order to be convicted of the filing of a false return: 1) the return filed with the IRS must contain a false statement with respect to a material matter; 2) the defendant must sign the return that contained the false information; 3) the defendant must not believe that that material matter was true and correct; and 4) the defendant must have acted willfully. In the context of Section 7206, a material false statement has been defined as a statement that “could hinder or affect the IRS in carrying out functions such as the verification of the accuracy of a tax return.” See United States v. Gassaway, 966 F. Supp. 1054 (W.D. Okla. 1997).
Any person who willfully files a false tax return shall be guilty of a felony and, upon conviction, shall be fined not more than $100,000 ($500,000 for corporations) and/or imprisoned not more than 3 years, or both, together with the costs of prosecution.
Willfulness under Internal Revenue Code Section 7206(1) is the same as tax evasion. Proof of willfulness will usually be specific, concentrating on particular items in the tax return, the accused’s knowledge of those items and the manner in which they were included or omitted. It is common for the government to charge both tax evasion under Internal Revenue Code Section 7201 and the filing of a false tax return under Section 7206(1) of the Internal Revenue Code with respect to the same tax return for the same year.
As a general rule, the filing of a false tax return is subject to a six year period of limitations. The statute of limitations for the filing of a false tax return begins with “the commission of the offense.” In the case of filing a “false tax return,” the statute of limitations begins with the time a tax return is considered filed. For criminal tax purposes, a return is considered filed “on the last day prescribed for filing.” See IRC Section 6513(a). For example, if an individual files his individual income tax return on February 15th, the six year statute of limitation will not begin to run until April 15th. If an individual has requested and received an extension of time for filing, the offense is committed not on the original due date of the return, but on the extended due date. A tax return filed after the due date is considered filed on the actual date of filing, not the normal due date. Consequently, a false tax return prosecution may be started more than six years after a tax return was filed or required to be filed. The statute of limitations for the filing of a false return can still be a “moving target” after a return is filed. This is because it is often unclear when the offense of the filing of false tax returns is complete. The offense of filing false tax returns is not necessarily complete when a tax return is filed because false statements made after a return is filed may constitute the “attempt to evade and defeat.” Thus, at least arguably, as with tax evasion, the statute of limitations for a filing of a false tax return case may be extended well beyond the statutory six years.
Aiding or Assisting
Aiding is assisting, supporting, or helping another to commit a crime. Where an individual aids or assists in the preparation or filing of false or fraudulent tax returns, the IRS may recommend that the United States Attorney’s office charge that individual under the aiding and abetting provisions of Section 7206(2) of the Internal Revenue Code. The statute reads as follows:
(2) Aid or Assistance. Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the internal revenue laws, of a return, affidavit, claim, or other document, which is fraudulent or is false as to any material matter, whether or not such falsity or fraud is with the knowledge or consent of the person authorized or required to present such return, affidavit, claim, or document; or ….
Those convicted of aiding and abetting may be guilty of a felony and subject to fines of not more than $100,000 ($500,000 for corporations) and/or imprisonment up to 3 years, and costs of prosecution.
Section 7206(2) is principally designed to reach the advisors of taxpayers who prepared fraudulent tax returns. It can and has included attorneys, tax accountants, and anyone who “aids or assists in, or procures, counsels, or advises.”
Willful Failure to Pay Estimated Taxes and Taxes
Section 7203 of the Internal Revenue Code provides for criminal penalties for individuals that fail to pay an estimated tax or other internal revenue tax. To establish the offense of a willful failure to pay tax, the following must be shown: 1) the individual was required by law to pay a tax that was due and owing; 2) the individual failed to pay the tax at the time or times required by law or regulations; and 3) the failure to pay was willful. Mere failure to pay a tax liability is not a crime. However, willfully failing to pay a tax liability is a punishable federal offense.
The IRS typically looks to an individual’s behavior to prove the willful element of Section 7203 and courts tend to look at an individual’s ability to pay their taxes to determine if the willful element of Section 7203 has been satisfied. “Willfully” as used in Internal Revenue Code Section 7203 has the same meaning as tax evasion and filing a false return.
Fraudulent Returns, Statements or Other Documents
Internal Revenue Code Section 7207 makes it a misdemeanor to willfully make false statements to the IRS. Internal Revenue Code Section 7207 is similar to Internal Revenue Code Section 7206(1), yet violations under it are only misdemeanors. In separating the two statutes, the United States Supreme Court stated there is a different level of willfulness under the misdemeanor and felony statutes. In addition, there is no requirement under Section 7207 that the return be signed under penalty of perjury. Second, the term “return” in Section 7207 is not limited to federal returns but could also include state returns offered in support of a federal tax return. Third, the felony applies only to documents willfully made and subscribed by the taxpayer, whereas the misdemeanor provision could be invoked on a document prepared by another and delivered by the defendant with knowledge of its falsity. Under Section 7207, any person who willfully delivers to the IRS a return or document known to that person to be fraudulent or false in any material matter may be fined not more than $10,000 ($50,000 in the case of corporations) and/or imprisoned not more than one year. See United States v. Bishop, 412 U.S. 346 (1973).
The United States Supreme Court has authorized the IRS under certain circumstances, to invoke Section 7206 (filing of a false return) a felony statute rather than Section 7206 misdemeanor statute for identical conduct. Whether the IRS should have such power has not been addressed by the United States Supreme Court. The difference between a misdemeanor and felony is significant and could have life changing consequences. It is always best to have a criminal tax attorney carefully review the facts and circumstances in any alleged filing of a false return criminal tax case.
Title 18 U.S.C. 1001- False Claims and False Statements
18 U.S.C. Section 1001 provides that whoever in any matter within the jurisdiction of any department or agency of the United States knowingly and willfully falsifies, conceals or covers up by any trick, scheme or device a material fact, or makes any false, fictitious or fraudulent statement or representations, or makes or uses any false writing or document knowing the same to contain any false, fictitious or fraudulent statement or entry, shall be fined not more than $10,000 or imprisoned not more than five years, or both.
This section has been used with particular success when a taxpayer makes a false statement or supplies false information to an IRS employee with respect to a tax return that has long been filed.
A conspiracy requires 1) an agreement between two or more persons; 2) an intent to enter into the agreement; and 3) an intent typically by at least two persons to achieve the objective of the agreement. Under 18 U.S.C. Section 371, a defendant can be charged with conspiring to commit a substantive offense (i.e., tax evasion or filing a false tax return) and conspiring to defraud the United States. Section 371 provides:
“If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof (such as the IRS) in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined up to $250,000 ($500,000 for organizations) or imprisoned not more than five years, or both.”
Much has been written about 18 U.S.C. Section 371. As a result, extended analysis is not necessary in this article. Suffice to say, conspiracy has been used successfully in tax fraud cases as an additional charge. It should be noted that no pecuniary tax loss is necessary to the United States. All that is required is the existence of an agreement between two or more persons to commit the offense of tax fraud and an overt act in furtherance of the conspiracy. It should be noted that the offense of conspiracy can be used as a vehicle to extend the statute of limitations on prosecutions for any criminal offense related to tax fraud. This is because the government may successfully take the position in court that a conspiracy to commit tax fraud might continue after the date of filing a tax return. The six year statute of limitations on conspiracy begins to run after the completion of the conspiracy.
This article only discusses a partial list of potential crimes charged in tax fraud cases. In addition to the offenses discussed above, other criminal sections have been used in criminal tax cases. For example, Title 31 (Money and Finance) of the U.S. Code has been used to prosecute individuals that fail to disclose foreign bank accounts to the IRS. Individuals targeted in an IRS criminal tax fraud investigation are also often charged with money laundering and wire fraud.
Winning or losing a criminal tax fraud case depends to a large extent on the actual facts of the case. However, this is one of the few areas of the criminal law where the most vital and damaging facts are consistently developed from the individual targeted by the IRS through voluntary statements, delivery of records, and the offer of weak defenses. This allows the IRS to pull together various inferences, assumptions, and presumptions to build a compelling case for tax fraud against the targeted individual. If you are being invested by the IRS, do not hurl yourself into your own funeral pyre or remain silent at your own peril, immediately contact a criminal tax attorney. The value of a qualified criminal tax attorney in an IRS criminal investigation is inestimable.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony Diosdi represents clients in all stages of international, federal, state, and local tax controversy- from audits through appellate litigation. Anthony Diosdi has significant experience resolving complex tax issues, including the handling of: offshore voluntary disclosure matters, grand jury investigations, tax court, claims court, and district court trials.
Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi is admitted to the California and Florida bars.
Diosdi Ching & 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: email@example.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.