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CRIMINAL TAX LAW - A WORLD OF SHADOWS

Posted on 11/11/2009

A WORLD OF SHADOWS

 

In Franz Kafka’s disturbing novel “The Trial,” Josef K one morning having done nothing truly wrong finds himself under arrest.  No one will tell him the charges. No one seems to care if he is guilty or innocent.  No one will say when his trial, a series of bizarre hearings and confrontations, will conclude. He is powerless, confounded by impatient bureaucrats and onlookers, while the powerful remain obscure.  Joseph K, a bank CFO, had until his arrest felt safe and secure.  In Kafka’s world, life is transacted beneath a disquieting shroud of uncertainty.

In the world of tax law, there is likewise an unsettling ambiguity about whether certain conduct is to be viewed as criminal or merely careless or negligent.  Rather than a bright red line one encounters a large gray continent traversed at great risk.  Like Josef K having come under scrutiny one becomes somewhat powerless in the grip of a baffling process.      

 

TAX EVASION

The crime of tax evasion involves a willful attempt to evade or defeat any income tax or the payment thereof.  With regard to evading tax, the government must prove: (1) a tax deficiency, i.e., that less than the correct tax was reported in the originally filed return; (2) an attempt to evade the tax; and (3) that the attempt was willful.  The attempt is proved through overt acts such as filing the false return, hiding assets and sources of income, keeping two sets of books or making false entries or alterations.  Willfulness is not the presence of an evil motive but rather a voluntary, intentional violation of a known legal duty.  For example, John Smith knows that his commission income is taxable but nonetheless files his income tax return knowingly leaving out the commissions. He has acted willfully.

Tax evasion is a major felony carrying up to a 5 year prison sentence and $250,000 fine, or both.

 

TAX PERJURY

A tax return is signed under penalties of perjury.  Lying in a tax return as to any material statement constitutes the felony of filing a false return.  An individual conviction can result in a sentence of up to three years in prison and/or a fine up to $250,000.   The government must establish (1) the defendant signed the return declaration (2) believed then that the return  filed was not true and correct, (3) the falsity in the return was material, and (4) was willful.  This statute is used by the government where it is possible to prove the falsity of a return but where it would be difficult to establish that the falsification was motivated by evasion.  Unlike tax evasion the government need not prove a tax deficiency.

 

NEGLIGENCE

Negligent conduct in filing one’s tax return is not a crime but there are civil penalties imposed under the “Accuracy-Related Penalty” regime.  The negligence penalty is 20% of the portion of the underpayment attributable to negligence or disregard of the rules or regulations.  Negligence under this portion of the law includes any failure to make a reasonable attempt to comply with the provisions of the tax law.  Disregard includes any careless, reckless or intentional disregard.   The civil negligence penalty is not imposed if one’s actions are found to be due to reasonable cause and were carried out in good faith.

What is troubling, how does one distinguish between intentional violation and intentional disregard?  Having no clear benchmark to distinguish criminal conduct from careless conduct gives to the prosecutor great and terrifying power decide who is to be put on the carpet and dragged off the cliff.   One’s life is severely damaged by a criminal tax case even if the jury’s ultimate verdict is not-guilty.

 

DELINQUENT OR AMENDED RETURNS

The same considerations apply when delinquent returns are filed.  Was the late filing merely negligent or was the failure to file on time willful?  For amended returns the question is always: Was the error or omission in the original return careless or intentional?  Because return preparers have no privilege these matters should be worked out with a tax lawyer.

 

CIVIL FRAUD PENALTY

The civil fraud penalty can also be asserted when tax fraud is alleged.  The penalty is 75% of the portion of the additional tax attributable to fraud.  It is calculated separately for each spouse and can be asserted on top of criminal sanctions or even if no criminal charges are brought or sustained.  The elements of proof are the same as for evasion but there is a lesser standard of proof - requiring clear and convincing evidence not evidence beyond a reasonable doubt as in a criminal trial. 

 

What Would Groucho Say?

This is some scary stuff.  On top of it all, Congress is busily adding mass to the Rubik’s Cube tax code.  Of course, the resultant tax changes will be called simplification.  The problem extends beyond tax law.  Congress, state legislatures, and municipalities grow the body of law like ameba.  I daresay it seems hardly possible to get through the day without committing some infraction.

But don’t frown like Karl Marx who had no sense of humor.  The Bolsheviks were serious and seriously misguided. The bloodthirsty knitting of madam Defarge in Dickens “A Tale of Two Cities” is likewise no answer.

We need some Groucho.  Groucho Marx was born in 1889 six years after Karl Marx (no relation) died.  Woody Allen calls him our greatest comedian.  Together with his brothers Harpo and Chico the Marx brothers made some of the funniest movies ever screened including “A Night at the Opera” and “A Day at the Races.”  Their humor was somewhat anarchist and poked fun at the stuffy, better than thou, upper crust. What would Groucho say?

 

GROUCHO: “A Child of five would understand this.  Send someone to fetch a child of five.”

GROUCHO: “Before I speak, I have something important to say.”

GROUCHO: “I worked my way up from nothing to a state of extreme poverty.”

GROUCHO:  I intend to live forever, or die trying.”

GROUCHO:  Next time I see you, remind me not to talk to you.”

GROUCHO:  The secret of life if honesty and fair dealing.  If you can fake that, you’ve got it made.”

GROUCHO:  There’s one way to find out if a man is honest – ask him.  If he says, “Yes,” you know he is a crook.”

GROUCHO:  These are my principles, and if you don’t like them…well, I have others.”

GROUCHO:  Who are you going to believe, me or your own eyes?”

 

 

 

DRAWING CONCLUSIONS

We have a self assessment system of tax paying that is also sometimes self- deluding.  We feel omnipotent when filing our returns.  We feel insulated like our friend Josef K in Kafka’s worrisome tale.  Most of us go about our existence never encountering the heavy boot of government intervention.  But for those on whom the boot falls, it falls hard.  People play the audit lottery but would never play Russian-Roulette even if only one of one-hundred rounds was in the gun chamber.  The consequence, however remote, is too harsh to risk.  

Many criminal tax investigations begin because a tax return is prepared carelessly or with a frivolous position taken in a return.  I admonish not being cavalier about your tax filings.  Take advantage of all available tax incentives, but report all income, take no undeserved deductions and assert no frivolous positions.  Hire an ethical, competent tax advisor.  Read your tax returns before signing and be certain that the statements in the return are true, accurate and correct.  It is unlikely any of you will become the target of a criminal tax investigation.  The consequences of such an occurrence, however, are so harsh, that it is wise to do all one can to stay off the government radar screen.  For if you are spotted and targeted even Groucho Marx humor will feel jaded.

Steinberg Talks Tax (TM), Volume 3, No. 10, November 11, 2009. Copyright 2009 by Robert S. Steinberg, All rights reserved.

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