“Tax avoidance” is the proper utilization of the tax collecting system to reduce the amount of tax debt due by means that are within the law of that revenue collecting authority. In contrast, “tax evasion” is evading the assessment or payment of a tax debt that is already owed at the time of the evasive conduct through some illegal means or process. Tax evasion is criminal, and has no effect on the amount of tax actually owed, although it may give rise to substantial monetary penalties and jail time.
Illegal Income and Tax Evasion
People who earn taxable income through illegal means must pay a tax on the earnings. Even if the income came from gambling, theft, drug trafficking, extortion and the like it must be reported as income and taxed accordingly by the IRS. Often persons with dubious ethical standards fail to report the income gained through illegal income sources. A famous lawbreaker, Al Capone, failed to report his income to the IRS for taxation purposes and he was successfully prosecuted for tax evasion even though the State had insufficient proof to prosecute him for those income generating criminal acts. Taxpayers who attempt to report illegal income as coming from a legitimate source could be charged with the crime of money laundering.
The Law and Tax Evasion
Internal Revenue Code section 7209 states the following:
“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.”
Under this statute and related case law, the IRS prosecution must prove, beyond a reasonable doubt, each of the following three elements:
- the "attendant circumstance" of the existence of a tax deficiency — an unpaid tax liability
- taxpayer "actus reus" (guilty act or conduct) — an affirmative act, and not merely an omission or negligent failure to act, constituting evasion or an attempt to evade either the assessment of a tax or the payment of a tax
- the required "mens rea" or "mental" element of willfulness — the specific intent to violate an actually known legal taxation related duty.
An act which might otherwise be perfectly legal such as moving funds from one bank account to another can provide the grounds for a tax evasion conviction provided the other two elements of the crime are also met. Intentionally filing a fraudulent tax return, which is a separate crime, could be used to form the basis of an illegal attempt to evade the "assessment" of the tax and then constitute the criminal act of tax evasion.
Help for Tax Evasion
Should the IRS has actually charged a taxpayer with the federally prosecuted crime of tax evasion that taxpayer will need the assistance of a criminal tax attorney. If he cannot afford an attorney the court may appoint one for him but at that point he is in severe trouble and may be looking at losing his freedom and doing some jail time. Consulting a tax attorney before taxation problems get to that stage is critical. It is important to remember that even if the taxpayer is refusing to pay taxes and needs to discuss reporting income generated by illegal acts that attorney is bound to silence by the attorney-client privilege and he can never reveal the confidences of his client. Understanding how to report the income is always preferable to risking jail time for not reporting it.
