Sam Brotman, JD, LLM, MBA April 21, 2021 23 min read

What Is Tax Evasion?

If you're an American that earns at least $10,000 per year, $25,000 if you’re married and filing jointly or over $400 if self-employed, you must file a federal income tax return. Selling your home or taking money out of your retirement account are also reasons you would need to file.

Since 1955, Tax Day has traditionally fallen on April 15, or in case of that day falling on a weekend, the first consecutive business day after that date. It might help to be reminded too, that the U.S. has a marginal tax rate system, so not all of your income is taxed at the same rate.

Of course, as long as taxes have been around, so has tax evasion. A math error won’t get you thrown in jail, but crazy deductions and willful lying can. If you have entertained the idea of not paying the full amount due on your income taxes, hopefully on the tail of that thought would be the pivotal question of “How much time am I willing to serve?”

If you have received a formal letter or an in-person visit from an IRS agent or two (they usually come in pairs), I’d suggest you give my office a call and we’ll get to work on keeping you on the right side of the bars.

Intent and Tax Evasion

Tax evasion is formally codified as 26 U.S.C. § 7201, and occurs when someone “willfully attempts in any manner to evade or defeat any tax imposed by this title.” Basically, tax evasion is when a taxpayer intentionally avoids their tax liabilities.

When people think of tax crimes, tax evasion is generally what comes to mind. Some classic examples of tax evasion include underreporting of income, hiding sources of money, and falsifying records. 

The tax evasion statute actually covers two different types of evasion. You can be charged with tax evasion for the evasion of assessment or payment. Sansone v. United States, 380 U.S. 343, 354 (1965). See also, United States v. Shoppert, 362 F.3d 451, 454 (8th Cir.), cert. denied, 543 U.S. 911 (2004); United States v. Mal, 942 F. 2d 682, 687-88 (9th Cir. 1991) (if a defendant transfers assets to prevent the I.R.S. from determining his true tax liability, he has attempted to evade assessment; if he does so after a tax liability has become due and owing, he has attempted to evade payment).

Evasion of assessment is when the individual attempts to avoid the collection of a tax by preventing the IRS from becoming aware that an unpaid tax is due. Most commonly, this is done by filing an incorrect tax return which leaves out or underreports income. See id. For example, John Doe works a 9 to 5 job for a company and includes his income from this job on his tax return. 

Good so far, but John Doe also flips properties as a side gig. This year, John Doe has been renting out some of these properties. He receives monthly rent payments, but purposefully does not include these rent payments on his tax return. John Doe could be charged with evasion of assessment.

Evasion of payment is when the IRS is aware of the tax liabilities, but the individual attempts to prevent the IRS from collecting that tax. See id. This most commonly occurs by concealing money or assets out of reach of the IRS. 

For example, Jane Doe has a bank account in Switzerland. Jane Doe does not report this account to the IRS and moves a substantial portion of her income into this offshore account to avoid paying taxes. Jane Doe could be charged with evasion of payment.

It is important to note that tax evasion and tax avoidance are not the same thing. Tax avoidance, when done correctly, is not a crime. See Gregory v. Helvering, 293 U.S. 465, 469 (1935). Tax avoidance is a legal use of methods to reduce the amount of taxable income or tax owed. See Internal Revenue Service, Understanding Taxes, Worksheet Solutions.

Some examples of these legal methods are claiming applicable deductibles or putting money into an IRA or 401(k) account. See id.

How Does the Government Prove Tax Evasion?

In order to successfully prove tax evasion, the Government must prove each of an essential set of facts called elements, beyond a reasonable doubt. See supra. How are Charges Selected? United States v. Marashi, 913 F.2d 724, 735-36 (9th Cir. 1990); United States v. Williams, 875 F.2d 846, 849 (11th Cir. 1989). If the Government fails to prove any one of these elements, the defendant should not be found guilty.

So, what are the elements for tax evasion?

  1. An attempt to evade or defeat a tax or the payment of a tax;
  2. An additional tax due and owing; and,
  3. Willfulness.

Sansone v. United States, 380 U.S. 343, 351 (1965); Spies v. United States, 317 U.S. 492 (1943); United States v. Lavoie, 433 F.3d 95, 97-99 (1st Cir. 2005); United States v. Farnsworth, 456 F.3d 394, 401-03 (3d Cir. 2006).

Attempt to Evade

First is the attempt to evade. This element is a bit different if you are being charged with evasion of assessment or evasion of payment.

To prove evasion of assessment, the Government has to point to some affirmative action taken by the taxpayer for the purpose of attempting to evade or defeat the assessment of a tax. This affirmative action is important because simple neglect or failure to do something would not meet the requirement for an attempt to evade. United States v.Masat, 896 F.2d 88, 97-99 (5th Cir. 1990). 

For example, not filing a tax return would not necessarily count as an attempt to evade assessment, but filing a fraudulent tax return would. Similarly, if you fail to file a tax return and you engage in misleading conduct such as destroying records, that could amount to an attempt to evade assessment as well. Spies v. United States, 317 U.S. 492, 498-99 (1943). See also, United States v. Brooks, 174 F.3d 950, 954-56 (8th Cir. 1999); United States v. Meek, 998 F.2d 776, 779 (10th Cir. 1993). 

The key difference in the latter examples is a deceptive act. It doesn’t matter if the taxpayer’s main reason for this affirmative action is something other than avoiding taxes. As long as the Government can show that tax evasion was a part of the motivation for the dishonest conduct, it can still count as an attempt to evade assessment. United States v. Voight, 89 F.3d 1050, 1090 (3d Cir.), cert. denied, 519 U.S. 1047 (1996).

For evasion of payment, the affirmative act is generally going to be some form of hiding money or assets out of reach of the IRS. Like evasion of assessment, a failure to do something alone is not enough. The simple failure to pay your assessed taxes, without some other misleading conduct, would not constitute evasion of payment. 

Examples of this misleading conduct for evasion of payment include hiding assets in family or friends’ bank accounts, keeping assets off the books (using only cash, not keeping financial records, not using banks or credit cards), making false statements about assets or property owned, and untruthfully declaring bankruptcy to prevent the collection of a tax. 

See, e.g., United States v. Huebner, 48 F.3d 376, 379-80 (9th Cir. 1994) (the defendant, having created false loan documents and then filed for bankruptcy, was successfully prosecuted for evasion of payment.); United States v. Shorter, 809 F.2d 54, 56-57 (D.C. Cir.), cert. denied, 484 U.S. 817 (1987); United States v. Shoppert, 362 F.3d 451, 460 (8th Cir.), cert. denied, 543 U.S. 911 (2004); United States v. Brimberry, 961 F.2d 1286,1290-91 (7th Cir. 1992); United States v. McGill, 964 F.2d 222, 233 (3d Cir. 1992). 

If one affirmative act was done with the intention to evade the payment of taxes over multiple years, the Government can charge a taxpayer with evasion for all of these years together. United States v. Shorter, 809 F.2d 54, 56-57 (D.C. Cir.), cert. denied, 484 U.S. 817 (1987)(upholding use of a single count of tax evasion covering twelve years of evasion of payment where the underlying basis of the count is an allegedly consistent, long-term pattern of conduct directed at the evasion of payment of taxes for those years). 

Additional Tax Due

For both types of tax evasion, the Government also has to prove that there was a tax deficiency (some tax actually owed that hasn’t been paid). To do this, the Government has to prove that the income in question was actually taxable. See, U.S.C. §§ 61, 62 and 63. Illegal sources of income such as gambling, drug proceeds, and kickbacks are actually taxable. See e.g., McClanahan v. United States, 292 F.2d 630, 631-32 (5th Cir.), cert. denied, 368 U.S. 913 (1961); United States v. Sallee, 984 F.2d 643 (5th Cir. 1993); United States v. Swallow, 511 F.2d 514, 519 (10th Cir.), cert. denied, 423 U.S. 845 (1975); United States v. Wyss, 239 F.2d 658, 660 (7th Cir. 1957).

The prosecutor doesn’t need to show an exact amount by which the taxpayer was deficient, but many states require that it be substantial. See e.g. United States v. Johnson, 319 U.S. 503, 517-18 (1943); United States v. Mounkes, 204 F.3d 1024, 1028 (10th Cir.), cert. denied, 530 U.S. 1230 (2000); United States v. Bender, 606 F.2d 897, 898 (9th Cir. 1979); United States v. Marcus, 401 F.2d 563, 565 (2d Cir. 1968), cert. denied, 393 U.S. 1023 (1969) ;United States v. Alker, 260 F.2d 135, 140 (3d Cir. 1958), cert. denied, 59 U.S. 906 (1959).

Willfulness

The last element of tax evasion is willfulness. This element is important to many of the tax crimes. The formal definition of willfulness is the "voluntary, intentional violation of a known legal duty." Cheek v. United States, 498 U.S. 192, 200-01 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 360 (1973); United States v. Pensyl, 387 F.3d 456, 458-59 (6th Cir. 2004); United States v. George, 420 F.3d 991, 999 (9th Cir. 2005). Essentially, it means you meant to do it.

Willfulness is a subjective test, meaning if the taxpayer had good faith belief that he is not violating a tax law, he has a legitimate defense to tax evasion. Cheek v. United States, 498 U.S. 192, 199-201 (1991). See also, United States v. Grunewald, 987 F.2d 531, 535-36 (8th Cir. 1993); United States v. Pensyl, 387 F.3d 456, 459 (6th Cir. 2004). However, this does not mean the taxpayer should get too comfortable.

Willfulness can be inferred from intentionally misleading conduct such as concealing or covering up income. The taxpayer also can’t simply turn a blind eye to an obvious tax liability. United States v. Willis, 277 F.3d 1026, 1031-32 (8th Cir. 2002); United States v. Dean, 487 F.3d 840, 851 (11th Cir. 2007).

Venue

The Government also has to show that the case was charged in the right place. See infra. For tax evasion crimes, venue is appropriate in the area that the crime was committed. Specifically, venue is proper in any judicial district where the tax return in question was made, signed, or filed. See, e.g., United States v. Marchant, 774 F.2d 888, 891-92 (8th Cir. 1985), cert. denied, 475 U.S. 1012 (1986)(venue appropriate where accountant prepared return); United States v. King, 563 F.2d 559, 562 (2d Cir. 1977), cert. denied, 435 U.S. 918 (1978)(prepared and signed); United States v. Gross, 276 F.2d 816, 819 (2d Cir.), cert. denied, 363 U.S. 831 (1960) (prepared); United States v. Albanese, 224 F.2d 879, 882 (2d Cir.), cert. denied, 350 U.S. 845 (1955)(prepared and mailed).

Statute of Limitations

Tax evasion also has to be charged by the Government within the timeframe provided by the law, called the statute of limitations. The statute of limitations for tax evasion is six (6) years. 26 U.S.C § 6531(2)

There is some debate as to when the six (6) years begins, but the general rule is that the Government has (6) years to charge tax evasion from the date of the last action taken to evade the tax, or from the date that the tax return in question was due, whichever is later.

What is the Punishment for Tax Evasion?

Punishment for a crime varies based on the specific facts of the case as well as the Defendant’s criminal history. However, if you are convicted of tax evasion, you could be facing some serious penalties.

Tax Evasion is a class E felony. It can be punished by up to five years in prison or five years of probation (you can also have a split sentence of some prison time and some probation time), and a fine of up to $100,000 (or $500,000 for a company), plus the costs to the Government for prosecuting the crime. 26 U.S.C. § 7201

Conclusion

If you’ve read this entire article, you should clearly know the difference between tax avoidance and tax evasion – sometimes quoted as “the difference between them being the thickness of a prison wall.” In simple terms, putting money away in an IRA or 401(k) is considered tax avoidance. Not claiming the income you’re making painting houses on weekends is tax evasion.

If you figured out the difference between the two a little late in the game, and are now facing possible felony charges for tax evasion, give my office a call. We will examine your situation and together decide on the best defence for your remuneration and acquittal. 

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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