By Anthony Diosdi
Todd and Julie Chrisley, stars of the reality TV show “Chrisley Knows Best,” were recently found guilty by a federal court jury of tax evasion. Tax evasion is probably one of the most misunderstood criminal tax provisions in the Internal Revenue Code. This article discusses the elements of criminal tax evasion and potential defenses to a charge of tax evasion.
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.
Additional Tax Due
To establish the crime of tax evasion, the Internal Revenue Service (“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.”
Defeat Any Tax or the Payment Thereof
This element of tax evasion, as noted above, includes all forms of federal tax. Tax evasion is different from other tax crimes in that it requires the IRS to prove a deficiency in the payment of tax. Whatever a taxpayer might do in the course of a tax year (i.e., maintain a double set of books, hide cash in an offshore account, prepare balance sheets that substantially understates his or her income), if at the time the taxpayer files his or her tax return has a change of heart and property reports his or her income to the IRS, he or she has not committed tax evasion. Even if a taxpayer fails to correctly report his or her income, but fails to report deductions which would have overcome any understated income and results in not being tax owed, this individual has not committed tax evasion (however, this individual may have committed the crime of filing a false tax return). Federal courts have taken the position that the tax obligations and tax benefits existing at the time may be considered in determining a tax due for purposes of the crime of tax evasion. The filing of an amended tax return and the payment of a tax deficiency does not eliminate this element of the offense of tax evasion.
Willfulness
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.
According to a Press Release from the United States Attorney, Todd and Julie Chrisley operated a loan-out company that received their income earned from their reality TV show and other entertainment ventures. To evade collection of a half a million dollars in delinquent taxes owned by Todd Chrisley, the Chrisleys opened and kept the corporate bank account only in Julie Chrisley’s name. One day after the IRS requested information about the bank account in Julie Chrisley’s name, the Chrisley’s transferred ownership of the corporate bank account to Todd Chrisley’s mother in an effort to further hide his income from the IRS. All this while, Todd Chrisley operated the loan-out company behind the scenes and controlled the company’s purse strings. This type of behavior to avoid the payment of tax would likely satisfy the “willful” element for tax evasion purposes.
Reliance Upon the Advice of Others Defense
An individual accused of tax evasion has a valid defense if he or she can demonstrate that he or she relied on a qualified advisor to whom he or she disclosed all pertinent facts and whose advice he or she followed. The difficulty with this defense is that it can never be offered hastily. If the IRS can prove a tax accountant knew the tax returns he or she prepared were false, the government may charge both the defendant and the tax advisor with the crime of conspiring to defraud the United States. This is what happened with Peter Tarantino, the accountant hired by Todd and Julie Chrisley. The Chrisleys were not only convicted of tax evasion, they were also convicted of conspiracy to defraud the United States.
Statute of Limitations
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.
Conclusion
If you are being investigated by the IRS for failing to disclose all of your taxable income, it is extremely important to retain the services of a criminal tax attorney before you make any incriminating statements or deliver records that may weaken your defenses. Winning or losing a tax evasion case obviously will depend to a large extent on the actual facts of your case. Nevertheless, this is one of the few areas of criminal law where the most vital and damaging facts are consistently developed from the criminal defendant. A criminal tax attorney, if he or she is called in time, may bring an investigation for tax evasion under control. At this point, we can only speculate how differently Todd and Julie Chrisley’s criminal tax case would have turned out if they retained the services of a criminal tax attorney at the first sign of trouble with the IRS.
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, criminal tax 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: adiosdi@sftaxcounsel.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.