Tax Evasion Lawyer

What tax evasion is under section 7201

Section 7201 of the Internal Revenue Code makes it a felony to willfully attempt in any manner to evade or defeat any tax or its payment, and Sansone v. United States, 380 U.S. 343 (1965), reads that as three elements.

• A tax deficiency. If the correct return would have shown no additional tax, because of deductions not claimed or basis not counted, there is no evasion.
• An affirmative act. Spies v. United States, 317 U.S. 492 (1943), lists the classic ones: a double set of books, false entries or invoices, destroyed records and concealed assets, and filing a false return is itself an affirmative act.
• Willfulness. The voluntary, intentional violation of a known legal duty, under Cheek v. United States, 498 U.S. 192 (1991). A genuine misunderstanding of the law defeats willfulness; a belief that the tax law is unconstitutional does not.

Evasion of assessment hides income before the tax is computed; evasion of payment hides assets afterward so the IRS cannot collect.

What tax evasion is not

Mistakes, negligence, aggressive positions and late filing are civil problems rather than evasion, because none of them involves an affirmative act and willfulness together. A disallowed deduction costs tax, interest and at most a 20 percent accuracy penalty under section 6662 of the Internal Revenue Code. Filing late costs a failure-to-file penalty under section 6651 of 5 percent a month, up to 25 percent. Owing tax you cannot pay is not evasion unless you hid assets to defeat collection; without an affirmative act the most the government has is a misdemeanor under section 7203. Even a return that was flatly wrong is not evasion if you believed it was right when you signed it.

Tax evasion versus tax avoidance

Tax avoidance is arranging your affairs within the law to pay the least tax the law allows, and tax evasion is lying about or hiding what the law requires you to report. Entity choice, timing a sale and taking every deduction you are entitled to are avoidance; the courts have said since Gregory v. Helvering in 1935 that no one is required to pay the most tax possible. The line is not how much tax you saved; it is whether the return told the truth. A large deduction fully disclosed on the return is a civil dispute. A modest one supported by an invoice you created afterward is evasion.

The penalties for tax evasion

A conviction under section 7201 of the Internal Revenue Code carries up to five years in federal prison for each count, a fine of up to $100,000 for an individual or $500,000 for a corporation, and the costs of prosecution. Section 3571 of title 18 of the United States Code allows a fine of up to $250,000 for an individual instead, and each tax year is a separate count. Section 6663 adds a civil fraud penalty of 75 percent of the underpayment attributable to fraud, and section 7454(a) puts the burden on the IRS to prove it by clear and convincing evidence.

How the government proves willfulness

Willfulness is rarely proved by a confession; it is inferred from conduct, which the IRS Manual calls badges of fraud. Understated income across several years, fictitious deductions, two sets of records, assets in other people’s names, a lifestyle the reported income cannot support, and false statements to the agent are the standard list. The deficiency is usually proved by an indirect method: the bank deposits method treats every deposit you cannot explain as income, and the net worth method, approved in Holland v. United States, 348 U.S. 121 (1954), asks where the growth in your wealth came from.

Common fact patterns

The same handful of situations produces most evasion cases.

• Unreported cash in restaurants, construction and medical practices with cash-pay patients.
• Two sets of books, including sales suppression software that deletes transactions.
• Nominee accounts, with income or assets held in someone else’s name.
• Offshore accounts left off the FBAR and the return, which adds a willful FBAR penalty of up to 50 percent of the balance under the Bank Secrecy Act.
• Payroll skimming, employees paid in cash or withholding kept, which is also a felony under section 7202 of the Internal Revenue Code.

The statute of limitations for tax evasion

The government has six years to bring a tax evasion charge under section 6531 of the Internal Revenue Code, running from the last affirmative act of evasion rather than from the tax year. A later act of concealment, such as a false statement to an auditor, restarts the clock, and time outside the United States does not count. Under section 6501(c)(1) the IRS can assess a fraudulent year at any time, so a year that is safe from prosecution is not safe from the bill.

What a tax evasion defense looks like

The defense takes the three elements apart one at a time, and it starts with the accounting, done inside the attorney-client privilege. We retain a forensic accountant under a Kovel arrangement so the reconstruction cannot be summonsed, and we recompute the tax with everything the government left out: nontaxable deposits, loans, gifts and deductions not claimed. On the affirmative act, we hold the government to the Spies standard: failing to file, failing to pay and sloppy records are not concealment. On willfulness, we build the record of what you understood and what your preparer was told, because good-faith reliance on a professional who had the full facts is a complete defense. Much of this is presented before any charge is filed, at the conference with IRS Criminal Investigation and at the Department of Justice Tax Division; where the facts are what they are, the goal shifts to a plea to a lesser statute and a defensible tax loss. The full process is on our criminal tax attorney page and the related charges on our tax fraud attorney page.

When an audit is really an evasion investigation

Some civil audits are evasion investigations that have not been labeled yet, and the signs are in the questions the agent asks. A revenue agent who asks why you did something rather than what you did, who wants Form 4822 completed with your personal living expenses, or who sends Letter 3164 announcing contact with third parties is building the elements of section 7201. An agent who then goes silent for months has usually made a referral. In an audit with cash, unreported income or missing records, assume every answer will be read by a special agent later. That is the eggshell audit, and our IRS audit attorney page explains how it is handled.

What is the difference between tax evasion and tax fraud?

Tax evasion is the felony in section 7201 of the Internal Revenue Code: a willful attempt to evade a tax through an affirmative act of concealment. Tax fraud is the broader label covering false returns under section 7206(1) and the 75 percent civil penalty under section 6663. Every evasion case is fraud; not every fraud case is evasion.

Can you go to jail for tax evasion?

Yes. Section 7201 of the Internal Revenue Code allows up to five years in federal prison for each count, and each tax year can be a separate count. Actual sentences follow the Sentencing Guidelines, driven by the tax loss, so a defense that reduces the loss changes the range.

What is the statute of limitations for tax evasion?

Six years under section 6531 of the Internal Revenue Code, measured from the last affirmative act of evasion, usually the filing of the false return. Time spent outside the United States does not count, and the civil fraud penalty has no deadline at all under section 6501(c)(1).