All About Tax Evasion, Penalties and Sentencing Guidelines

Tax Evasion, Penalties, Tax Loss & Sentencing

While there are many different types of tax crimes, the crime of tax evasion is one of the most well-known types of tax crimes. Oftentimes, when a person is charged or indicted with a tax crime that makes its way into the news, it will be for tax evasion. The reason why the US government likes to charge people with tax evasion is that, unlike other types of tax crimes, tax evasion is a felony. Thus, when a person is charged with this type of crime, the defendant tends to take the matter very seriously and the government can use it to press the defendant in order to get other information about other potential violations. And, even if a defendant does not want to play ball with the US government if there is any way for them to reduce it down to a tax fraud misdemeanor instead of a tax evasion felony, oftentimes they will cooperate. This is in addition to the fact that the US government tends to only take cases that it can win and has around a 90% success rate. Let’s walk through the basics of tax evasion, the type of penalties a person can be charged with, and what some common sentencing guidelines are.

Federal Crime of Tax Evasion

The crime of tax evasion can be found in the internal revenue code section 7201 as follows:

26 USC 7201

• • • Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.

What does this mean?

This definition is very important because while it is not very long or verbose, there is a lot condensed in the verbiage. For a person to be found guilty of tax evasion, the government must prove that, beyond a reasonable doubt, the person acted willfully and in order to evade or defeat tax. In other words, a negligent failure to report income would not be sufficient to pursue a Federal charge of tax evasion. In addition, there must be an intent to evade or defeat tax. This is important because there are other types of violations –– namely fraud –– in which a person acts with willfulness but not necessarily to directly avoid taxes. For example, if a person knowingly falsifies a document that is submitted to the US government on a tax-related matter, the violation may be considered tax fraud but without an intent to evade a tax, it is generally not tax evasion. Sentencing on the tax evasion charge alone can carry a sentence upwards of five years – noting that often times when a person is charged evasion, it is in conjunction with several other tax crimes as well as non-tax crimes as well, which may result in a significantly longer sentence.

Evade or Defeat a Tax or Payment 

In order to commit tax evasion, the person must seek to either evade or defeat any tax imposed. That is also very important because includes either evading a tax being assessed or the actual payment of a tax that has been imposed. Let’s take a look at what the Criminal Tax Manual provides:

Attempt To Evade Assessment

• • • “Although filing a false return is a common method of attempting to evade the assessment of a tax, the requirement of an affirmative attempt to evade can be met by proof of any affirmative act undertaken with a tax evasion motive. The Supreme Court “by way of illustration, and not by way of limitation,” set out examples of what can constitute an “affirmative willful attempt” to evade, in Spies v. United States, 317 U.S. 492, 499 (1943):

      • keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind, and – 7 – any conduct, the likely effect of which would be to mislead or to conceal.

    • Failing to file a return, coupled with an affirmative act of evasion and a tax due and owing, has come to be known as Spies-evasion, an example of which is found in United States v. Goodyear, 649 F.2d 226, 227-28 (4th Cir. 1981). The Goodyears failed to file a tax return for the year in question. Later, Mr. Goodyear falsely stated to Internal Revenue Service agents that the Goodyears had earned no income in that year, and the Goodyears both falsely told the agents that they had deposited all business receipts into corporate bank accounts.

    • The false statements to the agents were the affirmative acts of evasion supporting the Goodyears’ Section 7201 convictions. Goodyear, 649 F.2d at 227- 28. Similarly, proof of a false statement, on an application for an extension of time to file a tax return, that no tax is owed for the year is sufficient to meet the affirmative act requirement. United States v. Klausner, 80 F.3d 55, 62 (2d Cir. 1996).”

Attempt To Evade Payment

• • • “The affirmative acts of evasion associated with evasion of payment cases almost always involve some form of concealment of the taxpayer’s ability to pay the tax due and owing or the removal of assets from the reach of the IRS. Obstinately refusing to pay taxes due and possession of the funds needed to pay the taxes, without more, does not establish the requisite affirmative act necessary for an attempted evasion of payment – 10 – charge. See Spies, 317 U.S. at 499. Accord United States v. Hoskins, 654 F.3d 1086, 1091 (11th Cir. 2011) (evasion of assessment case) (a defendant must do more than passively fail to file a tax return, the statute also “requires a positive act of commission designed to mislead or conceal”).

    • Importantly, however, “[t]he government only need[s] to show one affirmative act of evasion for each count of tax evasion.” Id. (citation omitted); see also United States v. Gross, 626 F.3d 289, 293 (6th Cir. 2010) “([Section 7201] is distinct from the “willful failure to file” misdemeanor under § 7203, which requires the Government to prove only that the defendant willfully failed to pay income tax or perform one of the other requirements specified under that section.”).

    • Examples of affirmative acts of evasion of payment include placing assets in the names of others, dealing in currency, using nominees to conduct business, buy and sell assets, or conduct other financial transactions, or providing false information about assets or income to the IRS. See Cohen v. United States, 297 F.2d 760, 762, 770 (9th Cir. 1962); see also United States v. Carlson, 235 F.3d 466, 469 (9th Cir. 2000) (opening and using bank accounts with false social security numbers, incorrect places of birth, and incorrect dates of birth could easily have misled or concealed information from the IRS); United States v. Gonzalez, 58 F.3d 506, 509 (10th Cir. 1995) (signing and submitting false financial statements to the IRS); United States v. Pollen, 978 F.2d 78, 88 (3d Cir. 1992); (defendant placed assets out of the reach of the United States Government by maintaining more than $350,000.00 in gold bars and coins, platinum, jewelry, and gems in safety deposit boxes at bank, in a fictitious name); United States v. Beall, 970 F.2d 343, 345-47 (7th Cir. 1992) (defendant instructed employer to pay income to a tax protest organization); United States v. McGill, 964 F.2d 222, 227-29, 232-33 (3d Cir. 1992) (defendant concealed assets by using bank accounts in names of family members and coworkers); United States v. Brimberry, 961 F.2d 1286, 1291 (7th Cir. 1992) (defendant falsely told IRS agent that she did not own real estate and that she had no other assets with which to pay tax); United States v. Daniel, 956 F.2d 540, 542-43 (6th Cir. 1992) (defendant used other persons’ credit cards, used cash extensively, placed assets in other persons’ names); United States v. Conley, 826 F.2d 551, 553 (7th Cir. 1987) (defendant concealed “nature, extent, and ownership of his assets by placing his assets, funds, and other property in the names of others and by transacting his personal business in cash to avoid creating a financial record”); United States v. Shorter, 809 F.2d 54, 57 (D.C. Cir. 1987) (defendant maintained a “cash lifestyle” in which he “conducted all of his professional and personal business in cash,” possessed no credit cards, never acquired attachable assets, and maintained “no bank accounts, office ledgers, or receipts or – 11 – disbursement journals”), abrogated on other grounds by Daubert v. Merrell Dow Pharmaceuticals, Inc. 509 U.S. 579, 597-98 (1993); United States v. Hook, 781 F.2d 1166, 1168-69 (6th Cir. 1986) (defendant did not file a false return or fail to file, but concealed assets); United States v. Voorhies, 658 F.2d 710, 712 (9th Cir. 1981) (defendant removed money from the United States and laundered it through Swiss banks); but see McGill, 964 F.2d at 233 (mere failure to report the opening of an account in one’s own name and in one’s own locale is not an affirmative act).”

Affirmative Act for Tax Evasion

One very important aspect of tax evasion that differentiates it from other tax crimes such as tax fraud is the requirement that there is an affirmative act. For example, if a person knowingly fails to file a tax return — that typically will not be considered sufficient to carry a tax evasion charge, because there is no specific affirmative act elliptical (exception, exclusions, and limitations to this rule apply). On the issue of the affirmative act, the Criminal Tax Manual provides the following:

• • • “In order to establish the offense of tax evasion, whether of assessment or of payment, the government must prove, inter alia, that the defendant engaged in some affirmative conduct for the purpose of misleading the IRS or concealing tax liability or assets. There are any number of ways in which a taxpayer can attempt to evade or defeat taxes or the payment thereof, and Section 7201 expressly says “attempts in any manner” to evade or defeat any tax or the payment thereof. A common method used to attempt to evade or defeat assessment of a tax is the filing of a false tax return that understates tax liability, either by omitting income, claiming deductions to which the taxpayer is not entitled, or both.

    • Proposed Jury Instruction: A person may not be convicted of federal tax evasion on the basis of a willful omission alone; he/she also must have undertaken an affirmative act of evasion. The affirmative act requirement can be met by [the filing of a false or fraudulent tax return that substantially understates taxable income or by other affirmative acts of concealment of taxable income such as keeping a double set of books, making false entries or invoices or documents, destroying books or records, concealing assets or covering up sources of income, handling one’s affairs so as to avoid keeping records, and/or other conduct whose likely effect would be to mislead the Internal Revenue Service or conceal income].

    • Comment: The circuit pattern instructions on which this instruction is based refer to the offense as attempting to evade or defeat the “payment” of federal income tax. But understating of income tax liability on a tax return is usually associated with evasion of assessment. Affirmative acts associated with evasion of payment typically involve some form of concealment of the taxpayer’s ability to pay the tax due and owing or the removal of assets from the reach of the IRS. See § 8.06[2] of this Manual. In any event, it has been held that evasion of assessment and evasion of payment are not different offenses but are different means of committing the single offense of attempted evasion. See, e.g., United States v. Mal, 942 F.2d 682, 688 (9th Cir. 1991); United States v. Masat, 896 F.2d 88, 91 (5th Cir. 1990).”

Do People Who Commit Tax Fraud Go to Jail?

Most people who are convicted of tax evasion end up going to jail. That is because it is a felony and when a person is convicted of a felony, usually jail or prison time is involved. If instead, the taxpayer is able to reduce the charges to a misdemeanor, then depending on what kind of deal they enter into with the US government they may be able to eliminate the prospect of going to jail or prison.

Federal Sentencing Guidelines in General

There are federal sentencing guidelines that are generally followed, although it is not mandatory after booker (2005 Sup Ct) but are still used. As provided by the United States Sentencing Commission:

How the Sentencing Guidelines Work

• • • “The sentencing guidelines take into account both the seriousness of the offense and the offender’s criminal history. Offense Seriousness The sentencing guidelines provide 43 levels of offense seriousness — the more serious the crime, the higher the offense level.”

Base Offense Level Each

• • • “As provided by the type of crime is assigned a base offense level, which is the starting point for determining the seriousness of a particular offense. More serious types of crime have higher base offense levels (for example, a trespass has a base offense level of 4, while kidnapping has a base offense level of 32). Specific Offense Characteristics In addition to base offense levels, each offense type typically carries with it a number of specific offense characteristics. These are factors that vary from offense to offense, but that can increase or decrease the base offense level and, ultimately, the sentence an offender receives.”

Sentencing & Tax Loss

When it comes to determining what the sentence should be, one important aspect is in accordance with the tax loss associated with the vision put in other words, the federal guidelines provide for various levels depending on what the total impact is as to the tax loss.

Total Tax Loss Attributable to the Offense 

• • • “In determining the total tax loss attributable to the offense (see §1B1.3(a)(2)), all conduct violating the tax laws should be considered as part of the same course of conduct or common scheme or plan unless the evidence demonstrates that the conduct is clearly unrelated.

    • The following examples are illustrative of conduct that is part of the same course of conduct or common scheme or plan: (A) there is a continuing pattern of violations of the tax laws by the defendant; (B) the defendant uses a consistent method to evade or camouflage income, e.g., backdating documents or using off-shore accounts; (C) the violations involve the same or a related series of transactions; (D) the violation in each instance involves a false or inflated claim of a similar deduction or credit; and (E) the violation in each instance involves a failure to report or an understatement of a specific source of income, e.g., interest from savings accounts or income from a particular business activity. These examples are not intended to be exhaustive

    • ” This guideline relies most heavily on the amount of loss that was the object of the offense. Tax offenses, in and of themselves, are serious offenses; however, a greater tax loss is obviously more harmful to the treasury and more serious than a smaller one with otherwise similar characteristics. Furthermore, as the potential benefit from the offense increases, the sanction necessary to deter also increases.

    • Under pre-guidelines practice, roughly half of all tax evaders were sentenced to probation without imprison­ment, while the other half received sentences that required them to serve an average prison term of twelve months. This guideline is intended to reduce disparity in sentencing for tax offenses and to somewhat increase average sentence length.

    • As a result, the number of purely probationary sentences will be reduced. The Commission believes that any additional costs of imprison­ment that may be incurred as a result of the increase in the average term of imprisonment for tax offenses are inconsequen­tial in relation to the potential increase in revenue. According to estimates current at the time this guideline was originally developed (1987), income taxes are underpaid by approximately $90 billion annually. Guideline sentences should result in small increases in the average length of imprison­ment for most tax cases that involve less than $100,000 in tax loss. The increase is expected to be somewhat larger for cases involving more taxes.”

Prior Guidelines

• • • (A) $2,000 or less (6) 0-6

    • (B) More than $2,000 (7) 0-6

    • (C) More than $5,000 (8) 0-6

    • (D) More than $10,000 (9) 4-10

    • (E) More than $20,000 (10) 6-12

    • (F) More than $40,000 (11) 8-14

    • (G) More than $70,000 (12) 10-16

    • (H) More than $120,000 (13) 12-18

    • (I) More than $200,000 (14) 15-21

    • (J) More than $350,000 (15) 18-24

    • (K) More than $500,000 (16) 21-27

    • (L) More than $800,000 (17) 24-30

    • (M) More than $1,500,000 (18) 27-33

    • (N) More than $2,500,000 (19) 30-37

    • (O) More than $5,000,000 (20) 33-41

    • (P) More than $10,000,000 (21) 37-46

    • (Q) More than $20,000,000 (22) 41-51

    • (R) More than $40,000,000 (23) 46-57

    • (S) More than $80,000,000 (24) 51-63

Current Guidelines

• • (A) $1,700 or less (6) 0-6

  • (B) More than $1,700 (7) 0-6

  • (C) More than $3,000 (8 )0-6

  • (D) More than $5,000 (9) 4-10

  • (E) More than $8,000 (10) 6-12

  • (F) More than $13,500 (11) 8-14

  • (G) More than $23,500 (12) 10-16

  • (H) More than $40,000 (13) 12-18

  • (I) More than $70,000 (14) 15-21

  • (J) More than $120,000 (15) 18-24

  • (K) More than $200,000 (16) 21-27

  • (L) More than $325,000 (17) 24-30

  • (M) More than $550,000 (18) 27-33

  • (N) More than $950,000 (19) 30-37

  • (O) More than $1,500,000 (20) 33-41

  • (P) More than $2,500,000 (21) 37-46

  • (Q) More than $5,000,000 (22) 41-51

  • (R) More than $10,000,000 (23) 46-57

  • (S) More than $20,000,000 (24) 51-63

  • (T) More than $40,000,000 (25) 57-71

  • (U) More than $80,000,000 (26) 63-78

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

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