There are several rather technical defenses against a tax evasion charge. There is no general way to describe all of these defenses, so by way of example, we consider a distribution from a corporation to a shareholder.

As an initial matter, note that the government must prove three basic factors beyond a reasonable doubt, for tax evasion: attempt, willfulness, and the tax was “due and owing” (i.e. taxpayer had a tax liability). It is this last element that we focus on now.

The taxpayer’s attorney will defend against all three of these elements. Many of those attorneys, however, do not fully consider certain creative ways of showing that the taxpayer did not, in fact, have a tax liability. The IRS’s own Tax Crimes Handbook anticipates that a taxpayer will launch a defense against the “tax due and owing” element.

For example in a corporate context an often contested issue is whether a distribution received by a taxpayer is taxable income or just a return on the shareholder’s (taxpayer’s) investment. That is, the taxpayer’s counsel might argue the distribution is not taxable income because it is simply a return of a portion of the taxpayer’s capital investment in the corporation. To argue the contrary, the IRS must prove that the corporation possessed accumulated earning’s and profits (“E&P”) at the time of the distribution because a shareholder receives taxable income only when the C corporation makes a distribution from earnings and profits. Therefore, as a technical defense against the IRS’s charge that a shareholder/taxpayer committed tax evasion a taxpayer’s counsel could attempt to prove that the C corporation lacked accumulated earnings and profits at the time of the distribution.