To make a case for a charge of attempt to evade tax, the government must prove each of the following elements of the crime beyond a reasonable doubt:
- a tax deficiency exists (a return was filed with an understated tax liability or tax was owed and no return was filed)
- the defendant engaged in an affirmative act that constituted an attempt to evade or defeat the tax
- the defendant’s affirmative act was willful
ATTEMPTED EVASION OF TAX – EXISTENCE OF TAX DEFICIENCY
For the Government to make a case for attempted evasion of tax it will be required to present proof of the existence of a tax deficiency which it will attempt to establish by arguing that there was a greater tax due and owed than the amount previously reported on the tax return at issue. To prove the existence of a deficiency in tax, the government must be able to prove that the tax that lawfully should have been imposed on the taxpayer substantially exceeds the tax that was shown on the original return, if indeed a return was ever filed. If the taxpayer never did not file a return, the government will be required to prove that the taxpayer in fact had a tax liability for the time period at issue and was thus required to file. Unlike in a civil case, the government bears the burden of proof on the existence of a deficiency and may not rely on the presumption of correctness afforded to it in civil cases on this issue. The existence of a deficiency for purposes of attempted evasion of tax is determined at the time the return is filed or if no return is filed, at the time the return was originally due.
Several factors lessen the governments burden in proving that a tax deficiency exists. A tax deficiency is not required to have been assessed by the government against the taxpayer for the taxpayer to be convicted of tax evasion and thus it is rare for there to actually be an assessment of tax before the government has concluded the criminal tax proceedings. Moreover, the government is not required to quantify the exact amount of the alleged tax deficiency. Accordingly, it is somewhat irrelevant for the government to establish with certainty that the true deficiency is greater or less than as charged. All that is required under the law is that the government prove that the alleged tax deficiency is substantial. Whether a tax deficiency is substantial is a question of fact for the jury, but case law shows that relatively small amounts have been found to be substantial. In one published case, proof of successive annual deficiencies in the amounts of $3,656, $900, and $2,209 was held by the court to be sufficient to send the case to the jury.
To establish that additional tax is due and thus a tax deficiency exists, the government will attempt to prove that income was understated or omitted, deductions were overstated or an improper credit was claimed on a previously filed return or that a return was required to be filed and was not. Even where the government is able to prove omitted items of income or overstated deductions, no deficiency exists and thus no finding of tax evasion can be proven if the taxpayer can find offsetting overstated income or understated deductions somewhere else on the return. However, the burden of producing evidence of any offsetting overstated income or understated deductions is on the defendant.
ATTEMPTED EVASION OF TAX – AFFIRMATIVE ACT
The attempt to evade tax statute has been judicially interpreted to require an affirmative act constituting the attempt to evade tax in any manner. By far the most common method of proving the affirmative act element in bringing an attempted evasion of tax charge is for the government to attempt to prove that the defendant filed a false return. This is because the filing of a false return can constitute tax evasion alone even in the absence of any other affirmative act(s). Case law has shown that even a return that is unsigned by the taxpayer can constitute an attempt to evade, as can a false return signed by a taxpayer’s agent. Moreover, a taxpayer need not file a return to be convicted of attempt to evade taxes.
The mere failure to file may, when combined with other actions, constitute an attempt to evade taxes. However, the Supreme Court has held that the mere willful failure to file a return, without more, is only a misdemeanor. The willful failure to file must be coupled with some other affirmative action or willful commission to constitute a felony attempt to evade taxes. The following are examples of affirmative acts that, coupled with a failure to file, could result in an attempted evasion charge:
- Keeping a second set of books;
- Prematurely destroying books or records
- Concealing assets or covering up sources of income
- Handling one’s affairs to avoid making the records usual in transactions of the kind (cash structuring)
- Engaging in any conduct, the likely effect of which would be to mislead or to conceal
- Making intentionally false entries, alterations, invoices, or documents
Examples of acts that have been held by the courts to be considered attempts to evade tax:
- filing returns with knowingly incorrect social security numbers
- instructing employees not to talk to investigating agents about illegal income and advising them to inform their employer of any such contacts
- prematurely destroying books and records in the face of an examination
- intentionally ignoring relevant books and records in computing gross profit
- failing to report personal expenses paid by a corporation as income or claiming personal expenses as business deductions
- lying or intentionally misleading government investigators
- filing a false Form W-4, Employee’s Withholding Allowance Certificate to improperly reduce withholding
- willfully and knowingly filing a false return
- Intentionally concealing assets from a revenue officer that was attempting to collect tax, even though the identical assets were contemporaneously revealed to a revenue agent that was examining the taxpayer’s income tax returns
The government is not required to prove each affirmative act alleged but must only prove a single act.
ATTEMPTED EVASION OF TAX – WILLFULNESS
Willfulness, as discussed elsewhere, is typically the hardest element of a tax crime to prove and is typically proven from inferences drawn by a jury from the affirmative act(s) that formed the attempt. For example, the government could prove willfulness by presenting evidence to show that a criminal tax defendant concealed assets for the purposes of fraudulently reducing the estate tax. The very amount of the taxpayer’s allegedly evaded tax liability from prior and subsequent years is admissible in a tax evasion case to show willfulness as it bears directly on the defendant’s intention to evade and is probative as to whether the taxpayer’s actions were deliberate rather than inadvertent.
Willfulness, in the specific context of attempted tax evasion, means that a defendant must have had the intent to evade a tax that the defendant knew or belied to be owed. Other courts have defined willfulness in this context as an attempt by a defendant to defraud the government of a tax known or believed to be owed.
ATTEMPTED EVASION OF TAX – STATUTE OF LIMITATIONS
The statute of limitations for prosecution of attempted tax evasion is six years. However, the affirmative act(s) constituting evasion need not occur before or at the time the return is filed or at the time it became due which can effectively create exposure periods for evasion that can well exceed the six years following the due date or filling date of the fraudulent return at issue. Events that occur after the return is filed or due, such as lying to government agents, are commonly relied on to establish attempted evasion. The statute of limitations will also be held to start running from the last affirmative act thus a taxpayer may be prosecuted within six years of the final affirmative act constituting an attempt to evade.
The typical event starting the statute of limitations running is the filing of a false return. However, if a taxpayer, after filing a false return, commits additional affirmative acts directed at evading the same tax, usually by taking actions designed to perpetuate or cover up the fraud committed in the original false return, those additional acts will constitute attempts to evade tax and will alone extend the period for commencing a prosecution by another six years from the subsequent act. The extended statute of limitations scenario just described usually occurs when a taxpayer first files a false return and then subsequently makes false statements to IRS agents for the purpose of concealing his previously unreported income. For example, one particular court held that an indictment for tax evasion brought after the six year statue of limitation had run on the original fraudulent return was untimely and was thus dismissed but allowed a charge of attempted evasion for making false statements as to the fraudulent return to proceed.
A perhaps more relevant example would be where a taxpayer commits an affirmative act to evade tax where he fails to report income that he in turn used to open a foreign bank account, and subsequently commits additional affirmative acts when he fails to annually report his interests in the foreign accounts on form TDF 90-22.1 where his account balance exceeded $10,000.
