Frequently Asked Questions

What is "willful attempted tax evasion" and how might failures to file tax returns become willful attempted tax evasion?

The criminal provisions of the Internal Revenue Code are applicable to income tax, estate and gift tax, excise tax and any matter relating to reporting information to the Internal Revenue Service. Section 7201 of the Code clearly defines the charge/offense of willfully attempting to evade or defeat "any tax imposed...or the payment thereof... ." Section 7203 of the Code clearly defines the charge/offense of willfully failing to file or pay taxes at the time required by law. Section 7201 on its face is a felony. Section 7203 on its face is a misdemeanor. A section 7203 offense can, however, and often does constitute an attempt to evade and defeat the payment of tax referenced in section 7201. Thus, one of the subtleties in criminal defense practice in the tax area is that a willful failure to file, on its face a misdemeanor, can become the felony of willful attempted evasion.

Whether a failure or failures to file a return or returns might become willful attempted evasion depends greatly upon the ability of the government to prove by way of circumstantial evidence that intent to defeat or evade payment was the reason for the failure or failures to file. For the government to pursue an attempted evasion charge in a failure to file situation, there must usually be some evidence [some demonstration in documents or documented behavior] of deceit to avoid collection. The taxpayer's tax liability [liabilities] may have been determinable from records that were available, and these may support tax assessments that were "probable" such that they would have triggered liens and/or levies upon assets. This is the first peg. Moreover, assets may have been acquired by the taxpayer, purchased in the name of another with the taxpayer's funds, or transferred or hidden by some obscurity of title, all within a period of time during which failures to file are continuing. This is the second peg.

In a case decided by the Supreme Court in 1943, Spies v. United States, 317 U.S. 492, the Court faced rulings by circuit courts to the effect that failures to file could only be misdemeanors under the criminal failure to file statute, and was called upon to decide whether, the wording of the failure to file statute notwithstanding, such failures could be charged under the evasion statute. The argument of the defendant in Spies was to the effect, chiefly, that because of a psychological disturbance, amounting to something more than worry but something less than insanity, he had failed to file, and although he had sufficient income during the year in question to place him under a statutory duty to file a return and to pay a tax, and although he had failed to do either, there was no willfulness in his defaults. The evidence demonstrated that the defendant had insisted that certain income be paid to him in cash, that he had cash transferred to his bank by armored car, that he had deposited it not in his own name, but in the names of others of his family, and kept inadequate and misleading records. The taxpayer claimed that other motives animated him in these matters. The Court held that the evasion statute had been properly applied in convicting the defendant of willful attempted evasion, stating, among other reasons, the following:

The difference between the two offenses, it seems to us, is found in the affirmative action implied from the term "attempt," as used in the felony subsection. We think that in employing the terminology of attempt to embrace the gravest of offenses against the revenues, Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors. Willful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony. By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries of alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one's affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal. If the tax evasion motive plays any part in such conduct, the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime.

Thus it can be seen that notwithstanding statutory language presupposing that failures to file returns constitute misdemeanors, the context in which intent is seen in a failure (failures) to file case is what makes it a case for IRS to pursue an evasion charge or not.

How can misrepresentations in tax returns result in a criminal charge?

Signing and filing a return or returns containing information that is false to a material degree, or, as can be seen above, willfully failing to file returns with intent to evade the payment of tax, may be charged as felonies under Section 7201 of the Code. However, it is more the case in criminal defense practice that the Government will pursue a charge under Section 7206(1) [a felony] that a willful statement or statements were made on a tax return or returns under the pains and penalties of perjury. [Here, again, there is a lesser misdemeanor statute, Section 7207, covering the willful delivery or disclosure, or, alternatively, the furnishing of information, in a document known to be false or fraudulent in any material manner, and depending on context, a materially false document may support a charge of filing materially false returns under section 7206(1) or may consider a lesser charge in connection with a materially false statement made to the Government in a document.] Evidence of willfulness in the preparation and filing of returns may be equivocal, such that there are disputed issues of fact which would impede a reasonable probability of conviction of attempted evasion. In such cases, the Government will resort to Section 7206(1) to charge a taxpayer for willfully making and subscribing a return [or returns] "verified by a written declaration that it is made under the penalties of perjury, and which he [the taxpayer] does not believe to be true and correct as to every material matter." In any case, the ease with which the Government can prove the elements of this offense beyond a reasonable doubt where all of the elements of Section 7201 may not be so proved leaves open the possibility, and often a high probability, that a case with a fraudulent return "profile" presented after investigation to the Office of the United States Attorney for prosecution upon evidence that a taxpayer signed a return or returns under penalties of perjury, which he did not believe to be correct as to every material or matter, or, in the case of a tax return preparer, he or she assisted, procured, advised in the preparation of such a return which is false or fraudulent as to any material matter, will be prosecuted under that statute. [Whether a criminal case proceeds by reason of an administrative referral to the Department of Justice, Tax Division, or by reason of the IRS having been made the investigative arm of the Grand Jury — a topic discussed in other materials in this site — the Department of Justice, Tax Division will prosecute a case through the Office of the United States Attorney for the district in which the defendant resides or in which the crime was committed].

How easy is it for the Government to convict a taxpayer of a tax charge?

A misdemeanor requires only willfulness and the omission of the act required by the Code - the payment of tax when due, for example. As suggested above, omission can be used to support an inference of commission, of attempted evasion of collection as well as or instead of assessment of tax.

Section 7207 of the Code requires proof that the filing of a document was known to be false or fraudulent in any material manner at the time of filing to constitute the prohibited act described as the commission of a misdemeanor. Section 7207 does not, however, require that the act be done as an attempt to evade or defeat taxes. Conduct such as the submission of a false document with the intent of government reliance upon its authenticity, then, could violate Section 7207 without violating Section 7201 where the false statement, though material, does not constitute an attempt to evade or defeat taxation. This means that the evidence (circumstances) of the conduct does not relate to reducing tax liability. This may appear to be the case, for example, where a taxpayer understates his gross receipts and offsets this by also understating deductible expenses, to the effect that there is no tax deficiency, but it is not. In this example, the Government could charge a taxpayer with a section 7206(1) violation, on the grounds that he had understated his gross receipts, and although he also understated deductible expenses, with the possible result that his tax was not understated, he had willfully made and subscribed a tax return which contained a written declaration that it is made under the penalties of perjury, and which he did not believe to be true and correct "as to every material matter... ." Because in a Section 7201 prosecution, there must be proof beyond a reasonable doubt that the defendant's material misstatement resulted in a tax deficiency, the "default" for the Government is Section 7206(1).

The most "popular" charge in the Government's arsenal under the Tax Code, essentially the Government's "ace in the hole" where there is a dispute of fact over whether tax is due and owing, is Section 7206(1). Willfully making and subscribing a tax return which contains a written declaration that it is made under the penalties of perjury, and which the taxpayer does not believe to be true and correct "as to every material matter" is a matter turning upon the quality of the Government's evidence, as in all criminal tax case. However, every income tax return contains a written declaration that it is made under the penalties of perjury. The Government is entitled to rely upon the information presented in a tax return as authentic. If information in the return is false or fraudulent to a "material" degree, and the evidence supports a finding of willfulness in its preparation and presentation, the situation that the taxpayer can face is that the case may not be "triable" on any issue of fact or law due to the low threshold of proof needed by the government to prove its case beyond a reasonable doubt. This does not mean that defenses are absent, but, rather, that they may assist in plea negotiations and in sentencing.

What is a "material misstatement"?

Materiality is defined as "the magnitude of an omission or misstatement of accounting information." Some element of judgment must be incorporated into the application of accounting rules for keeping records and presenting information on tax returns based on it. If materiality is an element of the offense, such as it is in a charge under Section 7206(1), the government must be prove that the statements or representations on the tax return in question had a natural tendency to influence, or to be capable of influencing the decisions of the decision-making body to which it is addressed [the Internal Revenue Service].

What is the procedure followed for negotiating a plea agreement, what considerations must be weighed, and what is the role of the judge presiding at sentencing on a plea?

Negotiation of a plea agreement is upon evidence upon which the Government relies and upon such defenses as are available to the taxpayer [and truthful, as demonstrated by his evidence]. Negotiation of a plea is often the only real option for amelioration of the hardship, which can come at the hands of sentencing guidelines, to which, although advisory to federal judges at sentencing, the government must adhere in determining its recommendation for sentencing under the terms of any plea agreement. Guidelines follow tax loss in tax cases. The calculation of tax loss determines the recommendation of a number of months of incarceration within a sentencing "range" which the taxpayer must be prepared to accept as possible when accepting a plea. [Thus it is of paramount importance to have reduced the tax loss by reason of all acceptable evidence of expenses, offsets, occurrences which have favorable tax effect upon the calculation of loss]. There are no surprises in this regard because the Court's Pretrial Services personnel will have determined in advance of sentencing what the Guidelines prescribe and will have made a recommendation to the sentencing judge. One cannot be promised good fortune in the assignment of judges relative to whether or to what extent the judge will enforce a sentence within a sentencing range set forth in the Plea Agreement, or "depart" from it when sentencing. Many federal judges do, indeed, recognize that the entire process of "negotiation" of a plea agreement puts the criminal defendant under duress to cooperate in "negotiations." Cooperation includes acceptance of terms, including, in all cases, a full admission of guilt, without equivocation, despite whatever reservations the taxpayer may continue to have about his guilt. Sometimes, during the "colloquy" with the sentencing judge, a taxpayer pleading to charges pursuant to a plea at a sentencing hearing will dissemble, causing the sentencing judge to evaluate the voluntariness of the taxpayer's plea. If the plea is determined not to be voluntary, the sentencing judge may order that the case be put down for trial. All criminal tax defendants are entitled to have every element of a tax crime proven to the satisfaction of the jury beyond a reasonable doubt. By the force of this logic, one might indeed believe he has a case that could on its facts be tried to a jury with some sensible probability of a favorable outcome. At the point of sentencing on a plea negotiated with the Office of the United States Attorney, then, a criminal tax defendant may yet believe that he can equivocate, that is, say why he did not willfully sign a return, or intend to misrepresent or exclude information on tax returns in connection with which the tax loss that is driving his sentence sprang. Indeed, subjective beliefs supporting claims of innocence are often incredulous, but more often than not required to be submitted to the jury to decide whether they are exculpatory. At this sentencing hearing juncture, however, all defenses have been heard and factored in to a plea agreement. Sentencing memoranda have been prepared by each side. Equivocation about guilt equals failure to accept responsibility equals defense equals an order of trial by a judge, even at the point of a sentencing hearing on a plea agreement. Any possibility that a judge may have been lenient in sentencing will not be known. Any consideration given to a criminal defendant/taxpayer by the Government up until this time goes away, and the taxpayer is at his peril to face the full mandate under the guidelines of any subsequent sentence imposed after trial and conviction.

Contact A Boston Area Tax Lawyer

For more detailed explanations and answers to all of your tax questions, contact Theodore L. Craft online or call 888-TAX-RISK. Our office is in Melrose, Massachusetts.