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What is a tax that was “due and owing.”

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What is a tax that was “due and owing.”

Like almost all areas of law, especially tax law, there are nuances and exceptions. The government must prove beyond a reasonable doubt three basic things to show someone committed tax evasion—attempt, willfulness, and that the taxpayer owed a tax. This last element seems straightforward enough, but even the IRS’s own Tax Crimes Handbook recognizes that the defense counsel “will attack this element of the case if at all possible.” See Tax Crimes Handbook (2009), available here:

In other words, the government must show that “the criminal tax adjustments include[d] evidence of criminal intent.” Id. For this reason, sometimes the defense attorney will seek to show that the income from the alleged tax deficiency was not, in fact, “taxable income” as defined by the Internal Revenue Code. See I.R.C. Section 61. The general rule is that “gross income means all income from whatever source derived” and the Code goes on to list various, specific types of income.

However, there are various items of gross income that are not expressly identified in the Code. For example, gambling winnings. Unfortunately, in most cases, a taxpayer must pay taxes even on his winnings. This was the holding of an important case in the Ninth Circuit from the 1970s. See Garner v. United States, 501 F.2d 228 (9th Cir. 1974), aff’d on other grounds, 424 U.S. 648 (1976).

Even income from illegal activities counts as “gross income” for purposes of Section 61 of the Code and, therefore, for purposes of proving tax evasion, if the taxpayer failed to pay taxes on those proceeds. See Moore v. United States, 412 F.2d 974, 978 (5th Cir. 1969).

However, not every distribution to the taxpayer is “income,” and thus he need not pay tax on it. For example, if you borrow money from someone, the bank, or in most cases even from certain life insurance policies, it is not “income” to you, thus you do not need to pay taxes on it. The effect of this is that the government’s argument that you committed tax evasion because you did not pay tax on this borrowed amount will fail; it will fail because the third element of the offense—that there be a tax “due and owing”—will not be satisfied.

Bona fide loans must be distinguished from “false loans”—loans were the transferee and the transferor never “really” expect there to be repayment. Such “loan” proceeds are, in disguise, gross income, and tax must be paid on them. See United States v. Curtis, 782 F.2d 593, 596 (6th Cir. 1986) for an example like this.

Your qualified tax attorney can help you discern whether the government’s case against you for succeed or fail on these (or other grounds).