Tax Evasion

By Leitman, Rebecca; Okaro, Ngozi et al. | American Criminal Law Review, Spring 1996 | Go to article overview
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Tax Evasion


Leitman, Rebecca, Okaro, Ngozi, Porter, Christopher J. K., Werner, Gerard, American Criminal Law Review


I. Introduction II. IRC Section 7201

A. Elements

1. Existence of a Tax Deficiency

2. Affirmative Act Constituting Evasion

3. Willfulness

B. Defenses

1. Lack of Deficiency

2. Lack of Willfulness

3. Third Party Liability/Reliance

4. Selective Prosecution

C. IRS Investigations under Section 7201

1. IRS Policy

2. Taxpayer Response III. IRC Section 7202

A. Willful Failure to Collect Tax

B. Willful Failure to Account for and Pay Over Tax.

C. Elements

1. Duty to Collect and/or Pay Over Tax

a. The Responsible Person

b. The Statutory Duty

2. Failure to Collect Tax or to Failure to Truthfully Account for

and Pay Over Tax

3. Willfulness

D. Defenses IV. IRC Section 7203

A. Elements

1. Requirement to File a Return

2. Failure to File a Return

3. Wilfullness

4. Knowledge of Requirement

B. Defenses V. IRC Section 7206

A. Section 7206(1): Tax Perjury

1. Elements of the Offense

a. Signing a false return or document

b. Penalty of perjury

c. Falsity as to a material matter

d. Willfulness

2. Defenses

B. Section 7206(2): Aiding and Assisting

1. Elements

a. Aiding and assisting

b. Material falsity

c. Willfulness

2. Defenses VI. Statute of Limitations VII. Federal Sentencing Guidelines

A. Violations of IRC Section 7201

B. Violations of IRC Section 7202

C. Violations of IRC Section 7203

D. Violations of IRC Section 7206

I. Introduction

This article outlines the elements of tax evasion under the United States Internal Revenue Code ("IRC") sections 7201, 7202, 7203 and 7204.`Section two of this article presents the general elements of the crime along with its defences and the investigative process. Section three addresses the failure to collect and withhold tax. Section four addresses prosecution failure to file taxes. Section five discusses prosecution for "tax perjury" and "aiding and assisting" tax fraud. Sections six and seven discuss the IRC statute of limitations and application of the federal sentencing guidelines respectively.

II. IRC Section 7201

Violations of the IRC are prosecuted under an array of criminal tax statutes.(1) The "capstone of [this] system of sanctions"(2) is the felony provision 26 U.S.C. [sections] 7201, which provides for a maximum penalty of $100,000 and/or a prison term of five years for a willful attempt to defeat any tax obligation.(3)

A. Elements

To prove a [sections] 7201 violation, the government must prove three elements: (1) the existence of a tax deficiency; (2) an affirmative act constituting an evasion or attempted evasion of the tax; and (3) willfulness.(4) The government bears the burden of proving each element beyond a reasonable doubt.(5)

1. Existence of a Tax Deficiency

While all circuits require proof of a tax deficiency, some have interpreted [sections] 7201 to require that the amount of tax deficiency be "substantial."(6) The term "substantial" refers to the "amount of the tax evaded" and not to the amount of income unreported.(7) The existence of a deficiency may be demonstrated by the use of either direct or circumstantial evidence.(8)

The most accurate means of proving a deficiency with direct evidence is the "specific item method." Under this method, the taxpayer's books and records are used as direct proof of taxable transactions.(9) Direct evidence can also include evidence such as third-party testimony.(10) However, "proof of unreported taxable income by direct means is extremely difficult and often impossible" for the government to obtain.(11)

In the absence of direct evidence, the government usually relies on three methods of obtaining circumstantial evidence of unreported taxable income: (1) net worth; (2) cash expenditures; and (3) bank deposits.

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