Criminal Tax Willfulness
Contents
What is Criminal Tax Willfulness
Criminal Tax, Willfulness & Voluntary Disclosure: There is a common misconception about what the traditional voluntary disclosure program is used for in relation to willfulness. When it comes to civil violations, willfulness does not require deliberate or knowledge as it does in the criminal arena. For example, with FBAR Violations, willfulness may include Reckless Disregard (lacks actual intent) and Willful Blindness (lacks actual knowledge). When it comes to criminal willfulness, it requires more. And, like all crimes, the U.S. Government must prove the crime happened “beyond a reasonable doubt.”
With voluntary disclosure, the taxpayer will usually avoid the streamlined program (in a post-OVDP world) because they cannot certify under penalty of perjury that they are non-willful.
Even if they are willful in the civil arena, this does not mean they are criminally willful and/or subject to a potential IRS Special Agent Investigation not potential criminal indictment.
When Does Willfulness Become Criminal?
If your, or your “friend” believes they may become subject to an IRS Investigation, it is important to understand the distinction between civil and criminal tax violations.
Non-Criminal Example
If a person fails to report their income because they forgot to include it in their tax return, or legitimately and reasonably believed it was not taxable in the U.S. (such as foreign exempt interest) then that is not willful.
In other words, if a person did not act with the intent to defraud the U.S. Government, then (absent other facts) they cannot be criminally liable for the unreported income.
Criminal Example
David earns significant income from worldwide investments.
David has a CPA and David is aware that he has to report all of his income from around the world in the United States, since the U.S. taxes on worldwide income.
David received his statements from the foreign institutions, but intentionally did not tell his CPA about the income because he did not want to report it (even though the CPA did ask about any income earned outside of the Unites States), and pay tax on it (it is earned tax-free abroad, so he has not tax credits to apply).
Therefore, David willfully and with the intent to defraud the U.S. Government, did not report the income. This is a crime.
What Do Prior Cases say about Criminal Willfulness?
As provided in summary by the DOJ:
The prohibition of 18 U.S.C. § 1001 requires that the false statement, concealment or cover up be “knowingly and willfully” done, which means that “The statement must have been made with an intent to deceive, a design to induce belief in the falsity or to mislead, but § 1001 does not require an intent to defraud — that is, the intent to deprive someone of something by means of deceit.” United States v. Lichenstein, 610 F.2d 1272, 1276-77 (5th Cir.), cert. denied, 447 U.S. 907 (1980). The government may prove that a false statement was made “knowingly and willfully” by offering evidence that defendants acted deliberately and with knowledge that the representation was false. See United States v. Hopkins, 916 F.2d 207, 214 (5th Cir. 1990).
The term “willfully” means no more than that the forbidden act was done deliberately and with knowledge, and does not require proof of evil intent. McClanahan v. United States, 230 F.2d 919, 924 (5th Cir. 1955), cert. denied, 352 U.S. 824 (1956); McBride v. United States, 225 F.2d 249, 255 (5th Cir. 1955), cert. denied, 350 U.S. 934 (1956).
An act is done “willfully” if done voluntarily and intentionally and with the specific intent to do something the law forbids. There is no requirement that the government show evil intent on the part of a defendant in order to prove that the act was done “willfully.” See generally United States v. Gregg, 612 F.2d 43, 50-51 (2d Cir. 1979); American Surety Company v. Sullivan, 7 F.2d 605, 606 (2d Cir. 1925)(Hand, J.); United States v. Peltz, 433 F.2d 48, 54-55 (2d Cir. 1970),cert. denied, 401 U.S. 955 (1971) (involving 15 U.S.C. § 32(a). See also 1 E. Devitt, C. Blackmar, M. Wolff & K. O’Malley, Federal Jury Practice and Instructions, § 17.05 (1992).
Notable Defenses to Willfulness Cases
The U.S. Government has hit some roadblocks along the way:
Hawkins vs. FTB (California)
The 9th Circuit Court of Appeals held that (regarding disallowing a debt to discharged re: Tax Evasion)
“Therefore, a mere showing of spending in excess of income is not sufficient to establish the required intent to evade tax; the government must establish that the debtor took the actions with the specific intent of evading taxes.
Indeed, if simply living beyond one’s means, or paying bills to other creditors prior to bankruptcy, were sufficient to establish a willful attempt to evade taxes, there would be few personal bankruptcies in which taxes would be dischargeable.”
United States vs. Kokenis
The 7th Circuit Court of Appeals held that (regarding requiring defendant to actually testify to assert a good-faith defense to a criminal tax charge):
“The court erred in thinking that evidence of Kokenis’s state of mind had to come from Kokenis’s own testimony. See, e.g., United States v. Lindo, 18 F.3d 353, 356 (6th Cir.1994)
[T]he standard of evidence necessary to warrant a [good-faith reliance] instruction cannot include an absolute requirement that the taxpayer must testify, for that would burden the taxpayer’s own Fifth Amendment right against self-incrimination.”
The Best Defense is to be Proactive
Oftentimes, if a person committed a tax crime, BUT the money was legally sourced, then the applicant can reduce the chance of a criminal investigation by proactively submitting to IRS Voluntary Disclosure.
Golding & Golding: About our International Tax Law Firm
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Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
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- 20-years experience as a practicing attorney
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