What is Tax Evasion?

by Foodman CPAs & Advisors
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The IRS TAX CRIMES HANDBOOK states that there are two kinds of tax evasion: (a) the willful attempt to evade or defeat the ASSESSMENT of a tax, and (b) the willful attempt to evade or defeat the PAYMENT of a tax. Meaning, if a defendant Transfers Assets to prevent the IRS from determining his true tax liability, he/she has attempted to Evade Assessment; if he/she does so after a tax liability has become due and owing, he/she has attempted to Evade Payment.

[a] Evasion of ASSESSMENT. This is the affirmative act of filing a false return that omits income and/or claims deductions to which the taxpayer is NOT entitled. The tax reported on the return is willfully understated and creates a deficiency. Such willful under reporting constitutes an attempt to evade or defeat tax by evading the correct assessment of the tax.

[b] Evasion of PAYMENT. This offense occurs after the existence of a tax due and owing has been established (either by the Taxpayer reporting the amount of tax or by the IRS assessing the amount of tax deemed to be due and owing) and involves an affirmative act of concealment of money or assets from which the tax could be paid.

What is the “Attempt”?

In a Taxpayer’s attempt to evade assessment, the Taxpayer must undertake action; engage in an “affirmative” act for the purpose of attempting to evade or defeat the assessment of a tax.  Examples of “affirmative acts” are:

  • Filing false tax returns
  • Filing false amended tax returns
  • Failure to file tax returns coupled with an affirmative act of evasion known as the "Spies evasion."  Examples of this conduct are: (A) Keeping a double set of books. (B) Making false or altered entries. (C) Making false invoices. (D) Destruction of records. (E) Concealing sources of income. (F) Handling transactions to avoid usual records. (G) Any other conduct likely to conceal or mislead
  • Filing False W-2's plus Failure to file a tax return
  • False statements to Treasury agents relating to the fraud
  • Corporate officer's diversion of corporate funds to pay personal expenses
  • Sluicing off corporate income to principal shareholders in the guise of commissions or salaries out of proportion to the value of service rendered to the corporate taxpayer
  • Consistent pattern of overstating deductions
  • Concealment of bank accounts
  • Holding property in nominee names
  • Representing political gratuities as gifts
  • Doing business in diverse names and keeping large sums of cash in safe deposit boxes in numerous banks
  • Failure to file declaration of estimated tax, concealing or attempting to conceal true income, failure to pay income tax due, and filing frivolous returns
  • Structuring cash transactions to evade the filing of Bank Secrecy Act reports

Need Tax Deficiency for Tax Evasion

In a Tax Evasion case, the Government must demonstrate the existence of a tax that is due and owed.  Meaning, the Government must prove a tax deficiency in order to prove tax evasion. The government has to verify that the income from which the tax deficiency resulted was taxable income. Some examples of taxable income not specified in the Internal Revenue Code (IRC) are:

1.    Campaign contributions used for personal purposes

2.    Loans received with no intent to repay

3.    Gambling

4.    Embezzlement

5.    Extortion Proceeds

6.    Fraud Income

7.    Kickbacks

How does the Government define “willfulness”?

The IRC defines willfulness as: "voluntary, intentional violation of a known legal duty."  For purposes of tax evasion, the sixteen examples provided in the IRS Handbook make it easier to understand the concept of willfulness:

  1. Signing return knowing that the contents of that return understated income.
  2. Substantial understatement of income in successive years.
  3. Prior and subsequent similar acts reasonably close to the prosecution years.
  4. Failure to supply an accountant with accurate and complete information.
  5. Making false exculpatory statements to agents or causing them to be made.
  6. Destroying, throwing away, or "losing" books and records.
  7. Making or using false documents, entries in books and records, or invoices.
  8. Keeping a double set of books.
  9. Placing property or business in the name of another.
  10. Extensively using currency and cashier's checks.
  11. Spending large amounts of cash which could not be reconciled with reported income or engaging in surreptitious transactions using cash, money orders, or cashier's checks.
  12. Holding bank accounts under fictitious names.
  13. Handling one's affairs to avoid making the usual records required for such transactions.
  14. General educational background and experience may be considered as bearing on a taxpayer's ability to form a willful intent.
  15. The defendant's attitude toward the reporting and payment of taxes.
  16. Ignorance of law and claims that tax laws are not constitutional.

There is a Statute of Limitations

There is a six-year limitation period for the offense of willfully attempting to evade or defeat any tax under IRC Section 6531(2). The rule is that the limitation period begins to run 6 years from the date of the last affirmative act that took place or the statutory due date of the return, whichever is later.

How about Attempting to evade the payment of taxes?

Affirmative acts of evasion of payment almost always involve some form of concealment of money or assets with which the tax could be paid or the removal of assets from the reach of the IRS.  Failing to pay assessed taxes, without more, does not constitute evasion of payment (it may constitute willful failure to pay taxes under IRC Section 7203). In the absence of an affirmative act, obstinate refusal to pay taxes due and the possession of the funds needed to pay the taxes is insufficient for an evasion charge. Affirmative acts of evasion of payment involve schemes to deal in currency, place assets in the names of others, transfer assets abroad or omit assets on a Form 433-A, Collection Information Statement. Examples include:

  • Concealing assets by using bank accounts of family members and coworkers.
  • Making expenditures extensively by cash and through the use of third parties' credit cards and placing assets in the names of third parties.
  • Taxpayer's false statement to an IRS agent that she owned no real estate and had no other assets with which to pay tax.
  • Maintaining a cash lifestyle by conducting all personal and professional business in cash, possessing no credit cards, bank accounts, or accounting records and never acquiring any attachable assets.
  • Bankruptcy fraud.

Don’t be a victim of your own making

Willfully attempting to evade taxes is a felony.  Paying taxes due after the criminal investigation commences does not negate willfulness. The IRS published the Tax Crimes Handbook as a resource for Criminal Tax Attorneys in advising their clients regarding criminal tax matters.  If you are a Taxpayer with tax obligations, it is best to consult with your specialized tax representative.    

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