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What Makes A Failure to File Your Tax Returns a Felony? by SANDRA BROWN

Serial Non-Filer Pleads Guilty to Tax Evasion[i]

From 2009 through 2016, Daryl Brown received taxable income. Nonetheless, Mr. Brown did not file his tax returns to report his income nor did he pay the taxes he owed on such taxable income.  Mr. Brown did, however, take steps to evade his tax obligations, such as opening bank accounts and lines of credit in nominee names and using credit and debit cards from those accounts to pay for personal expenses. Additionally, he bought money orders with cash, directed others to buy money orders for him, and structured his purchase of money orders–sometimes from several locations on the same day–to avoid triggering reporting requirements that would have flagged his activity to the Internal Revenue Service (IRS).[ii]  Mr. Brown pled guilty to a charge of tax evasion and now faces a sentence of five years in prison.[iii]

While the recent press release in the above criminal tax case specifically referenced Mr. Brown’s failure to file his federal tax returns for multiple years, it is important to note that this case was not simply about his lack of filing timely tax returns. Rather, this case is about the intentional “affirmative” steps Mr. Brown took to conceal and misrepresent his financial dealings that resulted in his attempted evasion of his taxes.  In simple terms, it was the affirmative acts, not Mr. Brown’s serial non-filing of his tax returns, that resulted in the government charging him with tax evasion and which now has Mr. Brown facing five years in prison.[iv]

Does that mean the federal government can’t prosecute someone based only on evidence of an intentional failure to comply with a legal duty to file a timely (and honest) tax return?  The simple answer is – No.  While the willful failure to file a tax return is a misdemeanor, the government will bring failure to file charges in appropriate circumstances which can result in incarceration for the non-filer.  For example, actor Wesley Snipes was sentenced to 3 years in prison for his conviction for intentionally failing to file his tax returns[v] with the IRS for the years 1999, 2000 and 2001[vi], and  singer and actress Lauryn Hill was sentenced to 3 months in prison and 3 months of home detention in connection with her guilty plea for intentional failure to file tax returns for the years 2005, 2006, 2007, 2008 and 2009.[vii]

According to the IRS’s most recent published statistics which relate to the fiscal year 2016, 206 non-filer criminal tax investigations were opened and 157 non-filer tax cases were charged,[viii] while the overall criminal tax investigations and charged cases for that same year were reported to be 3,395 and 2,761, respectively.[ix]  Doing the math, that calculates to about 17% of the annual criminal tax cases involving non-filers.  The Commissioner’s recent announcement focusing on high income non-filers[x] should be a signal that more than ever that a willful failure to file will be vigorously pursued by the IRS, even if you are not a high profile taxpayer like Mr. Snipes or Ms. Hill.

For those who intentionally fail to file their tax returns in a timely fashion, particularly those “serial non-filers” like Mr. Brown who find themselves being prosecuted, there is often more going on. What is often going on is a series of intentional acts to defraud or conceal from the IRS information that would evidence an individual’s correct tax obligations.  Such affirmative acts not only moves a taxpayer into the realm of greater exposure for a criminal tax investigation and prosecution, but also increases the likelihood that such investigation will involve a charge of felony tax evasion

Tax evasion, which is shorthand for a crime of willfully attempting to evade or defeat the assessment or payment of a tax, requires the government to prove that the individual engaged in some affirmative conduct for the purpose of misleading the IRS or concealing tax liability or assets.[xi] While 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, the filing of a false tax return is not the only way in which a taxpayer can attempt to evade or defeat taxes or the payment thereof.  Failing to file a return, coupled with an affirmative act of evasion and a tax due and owing, which is known as Spies[xii]-evasion, qualifies as tax evasion.  A mere failure to file a return, standing alone, cannot constitute an attempt to evade taxes.[xiii]

So what constitutes an “affirmative willful attempt” to evade?  Here is a list of examples provided by the Supreme Court[xiv]: 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 any conduct, the likely effect of which would be to mislead or to conceal.  That means, the acts, or attempts, by which defendants can attempt to evade are virtually unlimited.

Although the IRS reserves the right to investigate and prosecute those who intentionally don’t file or pay taxes, the IRS is focused on tax compliance—its ultimate mission– and would rather work to encourage those individuals to come forward voluntarily or work out a payment plan instead of filing charges.  In other words, if you cooperate and come in before the IRS finds you, you’re less likely to be prosecuted.  On the other hand, the more blatantly fraudulent a taxpayer’s actions are, the more likely it is that the IRS will pursue prosecution.

Sandra R. Brown is a principal at Hochman Salkin Toscher Perez P.C. Prior to joining the firm, Ms. Brown served as the Acting United States Attorney, the First Assistant United States Attorney and the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Ms. Brown specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court.

[i]   https://www.justice.gov/opa/pr/serial-non-filer-pleads-guilty-tax-evasion.

[ii]  Id.

[iii]  Id.

[iv]  26 U.S.C. § 7201.

[v]  26 U.S.C. § 7203.


[vii] https://www.justice.gov/usao-nj/pr/singer-and-actress-lauryn-hill-sentenced-prison-failing-file-tax-returns-more-23-million

[viii] https://www.irs.gov/compliance/criminal-investigation/statistical-data-nonfiler-investigations

[ix] https://www.irs.gov/compliance/criminal-investigation/current-fiscal-year-statistics

[x] https://www.irs.gov/newsroom/irs-increases-visits-to-high-income-taxpayers-who-havent-filed-tax-returns

[xi] 26 U.S.C. § 7201.

[xii] Spies v. United States, 317 U.S. 492, 499 (1943).

[xiii] Id.; United States v. Hoskins, 654 F.3d 1086, 1091 (10th Cir. 2011); United States v. Nelson, 791 F.2d 336, 338 (5th Cir. 1986).

[xiv] Spies, 317 U.S. at 499.

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