Offshore Tax Evasion Crime is an IRS Enforcement Priority 2022

With the increased US Government enforcement of evasion of overseas income, assets, investments, and accounts — offshore tax evasion is a key priority. In fact, there are few international tax crimes more serious than Tax Evasion. That is because unlike other types of international violations — Tax Evasion is a crime and not a civil violation (such as Fraud, which the US Government can pursue as both a civil and criminal violation). With Tax Evasion, the Taxpayer has willfully committed a proactive act — usually requires more than just not filing a tax return, which technically is an “omission” and not an “affirmative act.” For decades, the IRS has been actively pursuing matters involving offshore non-compliance. But in the past few years, the number of offshore criminal investigations has been steadily rising, including FATCA criminal indictments and FBAR criminal indictments —  traditionally these were civil violations. When it comes to offshore and international tax-related matters, evasion typically involves money laundering and/or structuring in addition to foreign account, asset, and investment reporting non-compliance — and not just missing the FBAR filing requirement.  When a person is willful, neither the Streamlined, Delinquency nor Reasonable Cause options are available. Rather, the person submits to the traditional Voluntary Disclosure to try to avoid an offshore tax evasion investigation.

Is Offshore Tax Evasion a Crime?

Yes. Unlike other violations, offshore tax evasion is a crime that is codified under 26 USC 7201.

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 is Tax Evasion (26 USC 7201)

The statute for tax evasion (technically, attempt to evade or defeat tax) is founded in 26 USC section 7201.

26 USC 7201

The code provides the following definition of tax evasion:

• 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.

How is Tax Evasion Defined?

As provided in the Criminal Tax Manual (located on the Justice.gov website):

• “Tax evasion” is a shorthand phrase that many people use for all manner of tax fraud.

• But the charge of tax evasion, in violation of 26 U.S.C. § 7201, is not necessarily the best one to bring against individuals defrauding the IRS.

• Defendants frequently seek to exploit the fact that, in order to establish the crime of tax evasion, the government must prove the existence of a tax due and owing and willfulness. Prosecutors therefore should consider other charges, such as conspiring to defraud the United States, 18 U.S.C. § 371; filing false returns, 26 U.S.C. § 7206; or endeavoring to obstruct the IRS, 26 U.S.C. § 7212(a), as alternatives or supplements to the charge of tax evasion. 

What does this Mean?

It means that while there is a general concept of the word tax evasion — that tends to encompass several different types of actual tax violations beyond just actual tax evasion — the actual code section for tax evasion is 26 USC 7201 — and not all tax crimes amount to tax evasion. Depending on the facts and circumstances, the US Government may want to consider alternatives to a tax evasion charge.

Willful Attempt to Evade or Defeat the Assessment of Tax

There are many different ways a Taxpayer may attempt to evade or defeat the assessment of tax. But, is the idea that there must be an affirmative act — therefore, merely not filing a tax return without any other action would generally not meet the requirement to pursue an offshore tax evasion case.

As provided by the Criminal Tax Manual:

• The means by which defendants can attempt to evade are virtually unlimited.

• As noted above, Section 7201 expressly prohibits attempts to evade tax “in any manner.” In order to violate Section 7201, the taxpayer generally must take some affirmative action with an intent to evade tax.

• The general rule is that omissions to act will not satisfy the affirmative act requirement.

• For example, a mere failure to file a return, standing alone, cannot constitute an attempt to evade taxes. See Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Hoskins, 654 F.3d 1086, 1091 (10th Cir. 2011) (“To be liable under § 7201, a defendant must do more than passively fail to file a tax return”); United States v. Nelson, 791 F.2d 336, 338 (5th Cir. 1986).

Thus, in order for the government to prove Taxpayer willfully attempted to evade or defeat the assessment tax, there must be an affirmative act. The most common form of evasion is typically filing a false tax return and/or keeping a double set of books — the latter which can take the Taxpayer down the path of a Spies evasion investigation — which makes it easier for the government to bring a criminal indictment/complaint involving tax evasion.

Examples of a Willful Attempt to Evade or Defeat the Assessment of Tax:

• Establishing stock accounts for his children into which [the defendant] had his investment banking income redirected). United States v. Beall, 970 F.2d 343, 346-47 (7th Cir. 1992)

• Using a warehouse bank and instructing an employer to pay one’s income to a warehouse bank constitutes an affirmative act of evasion);6 United States v. Carlson, 235 F.3d 466, 469 (9th Cir. 2000)

• Opening and using bank accounts with false social security numbers and incorrect dates and places of birth could easily have misled or concealed information from the IRS); United States v. Valenti, 121 F.3d 327, 333 (7th Cir. 1997)

• Use of cash, not keeping business records, paying employees in cash and not reporting their wages to the IRS, advising employees they did not have to pay taxes); United States v. Jungles, 903 F.2d 468, 472- 74 (7th Cir. 1990) (employee’s use of “independent contractor” agreement to eliminate withholding and warehouse bank to evade income tax were affirmative acts).

Attempt To Defeat or Evade Payment is Also Tax Evasion

Unlike a Taxpayer’s attempt to evade the Assessment of Tax, the attempt to evade Payment of Tax is different. Many cases have held that merely not paying taxes is insufficient to carry a charge for tax evasion. But, since the government typically only has to show a single affirmative act per count of offshore tax evasion, Taxpayers need to be careful not to commit any affirmative act if they have already been assessed tax and are simply seeking to evade payment.

Examples of Willful Attempt to Evade or Defeat the Assessment of Tax

• Examples of affirmative acts of evasion of payment include:

  • [P]lacing 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) To read more click here.