The hardest element of the a government’s case to prove in charging a taxpayer with a tax crime is usually the element of willfulness because of the lack of direct evidence on this element in the absence of a confession on the taxpayer’s part. Because of the usual lack of direct evidence on willfulness, (testimony or admissions on the part of the defendant taxpayer or his counsel), the government is left to prove willfulness through the use of circumstantial evidence, such as a taxpayer’s act of keeping a double set of books or concealing assets. To attempt to prevent the government from establishing that the defendant taxpayer’s acts were willful, he or she may try to show that the defendant’s actions were merely inadvertent or that the current state of the law is uncertain as whether the taxpayer’s actions were willful. However, showing that a taxpayer disagreed with a law, was a tax protester, objects to taxes on religious grounds, or has personal problems are generally not effective defenses to willfulness.

Willfulness Defined

Most criminal tax offenses require that the defendant acted willfully. Criminal tax offenses include attempted evasion, failure to file a return or pay tax, making a false return, and aiding or assisting the preparation of a false document. The Supreme Court has held that the word “willfully” has the same meaning in all the criminal tax statutes whether they be felonies or misdemeanors.

In defining willfulness, Federal Courts have consistently stated that, despite their earlier references to “bad faith and evil intent”, a current finding that a defendant acted willfully does not require any proof of motive other than an intentional violation of a known legal duty. Court’s have consistently held that willfulness may be negated by establishing good faith claim of ignorance or misunderstanding of the law or a belief that there was no violation of the law by a taxpayer, regardless of whether the taxpayer’s belief appears to be objectively reasonable. However, establishing a good faith taxpayer belief that the tax laws are unconstitutional will not negate the element of willfulness.

An intentional violation of a known legal duty can be shown by a taxpayer’s reckless disregard for the law. Courts have held that a taxpayer’s knowledge of the law is not limited to his actual knowledge but includes a reckless disregard of a legal obligation that the defendant can be shown he or she was aware of in some manner. For example, to prove that a taxpayer attempted to evade taxes the government needs only show that the taxpayer had the specific intent to evade a tax that the taxpayer knew was owing. Similarly, to prove that a taxpayer willfully failed to file a return, all that need be shown is that the taxpayer knew of the obligation to file the return and intentionally failed to do so.

Willfulness & Failure to Pay Offenses

The willfulness requirement in failure to pay taxes cases raise the issue of whether a defendant’s inability to pay the tax in and of itself negates the element of willfulness or whether the government must present evidence to show that the defendant was financially able to pay the tax on or about the time the tax was due to establish willfulness.

Proof of Willfulness

The government’s production of proof on willfulness ordinarily consists of admissions made by the defendant (often in the absence of counsel) to government investigators or witnesses that are called to establish willfulness (often employees, whistleblowers and ex-spouses). Statements tending to indicate willfulness made by a taxpayer’s representative under a power of attorney on behalf of a defendant may also be used by the IRS in a criminal prosecution. However, absent an admission by the defendant or his counsel, the government will attempt to prove willfulness through the use of circumstantial evidence. The government will attempt to meet its burden of proof as to willfulness by examining the taxpayer’s entire course of conduct and will encourage a Jury to make reasonable inferences that can be properly drawn from the examined conduct. Historically, the government has had great success in establishing willfulness based on proper inferences drawn from any conduct that appears to have been engaged in by a defendant in order to mislead or conceal.

Proof of willfulness is both the criminal and civil contexts can also be very effectively established by through the use of objective facts that indicate willfulness on the part of a defendant. These objective facts are commonly referred to in the tax profession as “badges of fraud”. The government has relied on the following circumstances to meet is burden of proof as to willfulness surrounding tax crimes:

  • The withholding of financial information from accountants
  • The keeping a safe deposit box under an assumed name
  • The consist overstatement of deductions
  • The claiming of excess withholding exemptions
  • The claiming of false or overstated charitable deductions for property
  • The false claiming of exemption from income taxes
  • Leaving the United States with valuable assets in the face of or following an audit
  • Engaging in a pattern of tax evasion in previous and subsequent years
  • The supplying of false information to a return preparer (underreporting income or overstating deductions)
  • The prematurely destroying of records
  • The failure to keep adequate books or records
  • The concealing assets or sources of income while in collections
  • The keeping of a double set of books or records
  • The handling one’s affairs so as to avoid making the usual records in transactions of the kind (excessive cash transactions)
  • The failure or refusal to cooperate with, (including lying to), investigating agents
  • The participation in illegal activities
  • The taking of business deductions for personal expenses
  • The withholding of relevant information from tax preparer
  • Failing to file tax returns where a filing requirement existed
  • The filing of objectively false tax returns
  • The making of false journal entries or alterations to the books to lower taxable income
  • The creating of false documents (such as receipts to support fictitious deductions)

Understatement of Income

While the understatement of income in and of itself is usually insufficient to establish willfulness, a proven pattern of substantial understatement can successfully be used by the government to establish the element of willfulness.

State of Mind

When a taxpayer’s state of mind on a particular date is critical to the government’s case on willfulness, as in willful failure to file cases, the government will present evidence of events that occurred after that particular date as evidence of the taxpayer’s earlier state of mind. Both the government and the taxpayer generally can admit evidence on subsequent events for the facts that can reasonably be inferred from them. For example, evidence of a taxpayer’s previous noncompliance with the filing rules and requirements in a year immediately subsequent to the tax year or years at issue has been deemed relevant by the court’s to show the taxpayer’s willfulness and absence of mistake in filing false returns during the tax years at issue.

Education or Sophistication

Evidence concerning a taxpayer’s education or degree of sophistication has been deemed by the courts to be relevant in determining willfulness. Thus, the government will present evidence to show that a taxpayer was a professional or a sophisticated businessperson for its circumstantial effect on proving willfulness. On the other hand evidence establishing that a particular taxpayer was poorly educated or unsophisticated would tend to negate the government’s case as to willfulness.

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