Tax crimes require a “mens rea”—or “a guilty mind,” in addition to the criminal act (“actus reus”). The Internal Revenue Code, which is one of a few sources of law that defines what a tax crime is, does not use the term “mens rea,” however. Instead, it speaks of a taxpayer committing an act “willfully.” The central idea here is that the taxpayer must have acted willfully in committing his or her tax crime. For example, IRC §7201, which is one of the foundational tax crime statutes, provides that it is a crime for a person to “willfully attempt in any manner to evade or defeat any tax.”

Tax evasion has only three basic elements:

  • (1) willfulness,
  • (2) the existence of a tax deficiency, and
  • (3) an affirmative act constituting an evasion (or an attempted evasion) of tax.

This statute actually describes two different criminal tax offenses.

First, there is the offense of willfully attempting to evade or defeat the assessment of a tax. This occurs when the taxpayer attempts to prevent the IRS from knowing that there is unpaid tax. Essentially, the goal is to preclude the IRS from even making an attempt to collect from taxpayer in the first place (the IRS will not send a bill if it does not know a taxpayer has a liability). This is the more obvious form of evasion, and it occurs when a taxpayer files a false return by under reporting his income or overstating his deductions or credits.

Second, there is the offense of willfully attempting to evade or defeat the payment of a tax. This sort of offense arises when the IRS already knows of a taxpayer’s liability (and has probably also assessed a liability for it), but the taxpayer tries to prevent the IRS from collecting the tax. For example, the taxpayer places all his assets into an offshore (foreign) trust where the IRS cannot reach them, or he intentionally spends all his money so he has none with which to pay his tax liability.

Even though these are two separate offenses, they are related. In fact, it would seem that the first entails the second. That is, if one willfully attempts to evade a tax assessment, he implicitly is also willingly attempting to evade a tax payment. The converse, however, does not hold true: One can evade a tax payment without evading an assessment, as discussed just below (See Kawashima v. Holder, 132 S. Ct. 1166 (2012)).

Notice the operative term in both these offenses is the “willful” component. Notice further that what is crucially absent from this list is an element of fraud or deceit. How can one willfully attempt to evade without engaging in some sort of fraud or deceit, one might ask?

A recent case addressed this. In Kawashima v. Holder, 132 S. Ct. 1166 (2012), the Supreme Court held that it was possible for one to willfully evade or defeat the payment of a tax without engaging in fraud or deceit by filing a true return but moving one’s assets beyond the IRS’s reach. That is, a taxpayer could simply file an accurate return, but take steps to evade paying the actual tax liability by transferring his assets to certain trusts or entities or locations where the IRS cannot reach them. In such a case, technically, there was no deceit or fraud because there was no “misrepresentation” to the IRS: the tax return was correct.

The discussion thus far begs the question, So when does a person act “willfully”? Normally when willfulness is defined in case law, it is done so in terms of the taxpayer performing an act knowing that it was unlawful. However, other times, depending upon the nature of the acts in question, more needs to be said about it.

Suppose one merely seeks to delay his payment to the government. Would that constitute a willful attempt to defeat the payment of a tax, tax fraud? The Ninth Circuit initially said, “No,” but it later qualified its statement on this.

In Edwards v. United States, 375 F.2d 862 (9th Cir. 1967), the court held that the taxpayer did not attempt to defeat the payment of a tax (and thus did not commit tax fraud) when he merely intended to postpone paying; what is required is that the taxpayer intend a permanent evasion or nonpayment. In that case, the taxpayer had filed his returns “tardy,” and the “taxable period ha[d] not been evaded; its payment ha[d] merely been postponed.” The court explained (emphasis added):

“The trouble in this case is in its lack of proof of willfulness in the sense of a specific intent to evade or defeat the tax or its payment. Evasion and defeat, as we understand their use in this section, contemplate an escape from tax and not merely a postponement of disclosure or payment. A knowing and intentional omission to file could be the result of either purpose, and either purpose might support a prosecution for the state crime of embezzlement or other form of theft. Tax evasion, however, focuses on the accused’s intent to deprive the Government of its tax moneys, and this requires more than just delay.

Edwards v. United States, 375 F.2d 862, 867 (9th Cir. 1967) in short therefore stands for the proposition that merely attempting to postpone the payment of taxes is not sufficient intent to constitute the crime of income tax evasion.

However, as mentioned above, the Ninth Circuit has since limited its holding in Edwards. The court limited its holding to the unique facts of that case to where there was no evidence at all of intent by the taxpayer to permanently avoid payment of his taxes—but merely a delay. See also United States v. Huebner, 48 F.3d 376, 380 (9th Cir.1994) (indicating the escape not postponement “statement in Edwards must be read in the light of the facts of that case.”). Furthermore, other Circuits (e.g. the Eight Circuit) simply disagree with the Ninth Circuit’s holding in Edwards.