The most common federal tax crime is tax evasion, which is specifically defined in 26 U.S.C. § 7201 as a failure to report taxes, reporting taxes inaccurately, or failing to pay taxes. To establish a case for tax evasion under section 7201 of the Internal Revenue Code (IRC), the government must prove each of the following beyond a reasonable doubt: that the taxpayer attempted to evade or defeat a tax or payment of a tax; an additional tax was due and owing; and the taxpayer acted willfully. If the IRS proves its case for tax evasion against a taxpayer, the penalty can be significant including monetary fines and jail time.
Who Can Be Prosecuted for Tax Evasion?
26 U.S.C. § 7201 states: “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 . . .” The definition of the crime contained in the tax evasion statute refers to “any person,” which gives the statute a broad scope. Due to its broad scope, the statute can apply to an individual taxpayer, as well as the taxpayer’s tax preparer, accountant, bookkeeper, or accountant (1). Tax evasion under 26 U.S.C. § 7201 can also be used to prosecute a corporate officer who attempts to evade their corporation’s corporate tax, or the administrator of an estate who attempts to evade the estate’s tax. The looseness of the “any person” language in the statute also means that a person other than the taxpayer can be prosecuted as a principal for the crime of tax evasion, even if the person aided and abetted the taxpayer in the evasion.
The statute’s language also makes use of the phrase “any manner,” which expands the scope of the crime to allow for any type of attempt to evade taxes to form the basis for prosecution. The crime can be committed when a substantial attempt to evade taxes is made in “any manner,” even if the attempt was ultimately unsuccessful. The statute also include broad language in the description of “any tax,” which means that tax evasion is not limited to income tax, but can include other forms of tax, including estate tax, excise tax, or employment taxes. The broad scope of possible offenses makes it critically important for anyone who may potentially be facing charges of tax crimes to seek the counsel of an experienced tax fraud attorney.
Understanding the Three Elements of the Tax Evasion Statute
The tax evasion statute can be found at 26 U.S.C. § 7201, which sets forth the three elements of the crime:
1. the existence of an additional tax due and owing;
2. an attempt by the taxpayer to evade or defeat the tax;
3. willfulness on the part of the taxpayer (2).
In Sansone v. United States, the Supreme Court described the statute as follows: “[T]he elements of § 7201 are will-fullness; the existence of a tax deficiency; and an affirmative act constituting evasion or attempted evasion of the tax” (3).
Element 1: Additional Tax Due and Owing
Under the terms of the tax evasion statute, the government must prove the existence of an additional tax due and owing in order to prosecute the taxpayer. This generally requires that the government demonstrate that the taxpayer owed substantially more tax than was reported; but the government does not need to show the exact amount of tax evaded (4). Different courts have disagreed as to whether the government must truly prove that the amount of tax evaded was “substantial”; in some courts, the government might not even have to make such a showing. In that case, the government would have a much easier burden to prove its case for tax evasion against the taxpayer.
In tax evasion cases, this requirement typically falls into one of the following categories: (1) understatements or omissions of income; (2) claims of fictitious or improper deductions; (3) false allocations of income; or (4) improper claims of credit or exemption. To prove this element of the statute, the government can use direct evidence or indirect circumstantial evidence. Using direct evidence, the government will typically attempt to make its case against the taxpayer by presenting evidence of specific transactions affecting taxable income which the taxpayer did not accurately report on the tax return. Another method used by the government involves looking for unexplained increases in the taxpayer’s net worth or expenditures which are not reflected on the taxpayer’s tax return. Finally, the government also may look at a taxpayer’s bank deposits for evidence of taxable receipts that the taxpayer never reported to the IRS.
A future article on the topic of tax evasion will explain in detail the remaining two elements of the tax evasion statute: an attempt by the taxpayer to evade or defeat the tax; and willfulness on the part of the taxpayer.
How a Tax Attorney Can Help with Tax Evasion Problems
If you are under investigation by the IRS for criminal tax evasion then you must consult with an experienced tax attorney.
Tax Law References:
- United States v. Alker, 255 F2d 851 (3d Cir. 1958) (attorney prosecuted under the tax evasion statute); United States v. Brill, 270 F2d 525 (3d Cir. 1959) (CPA prosecuted under the tax evasion statute).
- 26 U.S.C. § 7201.
- Sansone v. United States, 380 US 343, 350 (1965).
- United States v. Nunan, 236 F2d 576 (2d Cir. 1956), cert. denied, 353 US 912 (1957) ; Tinkoff v. United States, 86 F2d 868 (7th Cir.), cert. denied, 301 US 689 (1937) ; United States v. Schenck, 126 F2d 702 (2d Cir.), cert. denied sub nom. Moskowitz v. United States, 316 US 705 (1942).