Spies Evasion – What is IRS Spies Evasion for Non-Filed Tax Returns?

Spies Evasion – What’s Spies Evasion for Non-Filed IRS Tax Returns?

When it comes to case law, there are usually a handful of cases that help shape a certain area of the law — and IRS tax law is no different.  And, when it comes to tax law, one of the most feared crimes in tax law, is Tax Evasion. Why? Because unlike Tax Fraud, Tax Evasion is always criminal — and may result in both monetary fines and prison.

Spies Evasion

Spies was a U.S. Supreme Court case that dealt with the concept of tax evasion, and what the government must prove in order to secure an eviction for tax evasion — in a situation when someone did not file a tax return.

IRS Tax Crimes Handbook

The IRS Tax Crimes Handbook is a great resource, and in part helps summarize “Spies.”

As provided in the Handbook:

• • • Failure to file return coupled with an affirmative act of evasion is commonly referred to as a “Spies evasion.”

    • Passive failure to file tax returns is not tax evasion.

    •  If the taxpayer failed to file a return, an evasion case can be maintained only if the taxpayer engaged in an affirmative act to conceal or mislead. Spies v. United States, 317 U.S. 492, 498-99 (1943).

    • By way of illustration, and not by way of limitation, the Supreme Court in Spies set out examples of conduct which can constitute affirmative acts of evasion:

      • Keeping a double set of books.

      • Making false or altered entries.

      • Making false invoices.

      • Destruction of records.

      • Concealing sources of income.

      • Handling transactions to avoid usual records.

      • Any other conduct likely to conceal or mislead.

Examples of Affirmative Acts of Evasion

The following is an example of each type of affirmative act on the  list:

Keeping a Double Set of Books

When a business has one set of records, which reflects the accurate depiction of the business, and then a second “false” set of books which is intentionally inaccurate — usually with the goal of omitting income and reducing tax liability

Making False or Altered Entries

Intentionally including non-existent entries (such as expense deductions that were not true) or modifying actual entries to increase or decrease the value — dependent on the specific goal of the entry.

Making False Invoices

Creating invoices that were not true or accurate.

Destruction of Records

This is generally used to conceal the evidence, by destroying it.

Concealing Sources of Income

Sometimes, income may be taxable at different levels (or even exempt/included) depending on the source. By concealing the source, the evader seeks to artificially reduce income.

Handling Transactions to Avoid Usual Records

One common example is to accept payments in cash, and then not to “log” the cash as an income entry — in order to avoid receipts, invoices or other records.

Any Other Conduct Likely to Conceal or Mislead

There are many other different types of methods for concealing income and/or artificially reducing income or increasing expenses.

Criminal Willfulness

Willfulness is required to prove evasion. And, As provided by the court, and summarized in the criminal tax manual — willfulness can be inferred.

As provided by Spies:

• • • “Willfulness may be inferred from “any conduct, the likely effect of which would be to mislead or to conceal.”

Examples of Willfulnes Conduct

Signing return knowing that the contents of that return understated income.

– United States v. Olbres, 61 F.3d 967, 970-71 (1st Cir.), cert. denied, 516 U.S. 991 (1995).

Substantial understatement of income in successive years.

– United States v. Lavoie, 433 F.3d 95, 98-99 (1st Cir. 2005); United States v. Kim, 884 F.2d 189, 192-93 (5th Cir. 1989); United States v. Krzyske, 836 F.2d 1013, 1019-20 (6th Cir. 1988); United States v. Skalicky, 615 F.2d 1117, 1120 (5th Cir.), cert. denied, 449 U.S. 832 (1980); United States v. Larson, 612 F.2d 1301, 1305 (8th Cir.), cert. denied, 446 U.S. 936 (1980); United States v. Gardner, 611 F.2d 770, 776 (9th Cir. 1980).

Prior and subsequent similar acts reasonably close to the prosecution years.

– United States v. Johnson, 386 F.2d 630, 631 (3d Cir. 1967); United States v. Magnus, 365 F.2d 1007, 1011-12 (2d Cir. 1966); United States v. Alker, 260 F.2d 135, 156-57 (3d Cir. 1958), cert. denied, 359 U.S. 906 (1959).

Failure to supply an accountant with accurate and complete information.

– United States v. Lavoie, 433 F.3d 95, 99 (1st Cir. 2005); United States v. Bishop, 291 F.3d 1100, 1106- 08 (9th Cir. 2002), United States v. Olbres, 61 F.3d 967, 970-71 (1st Cir.), cert. denied, 516 U.S. 991 (1995); United States v. Brimberry, 961 F.2d 1286, 1290-91 (7th Cir. 1992); United States v. Chesson, 933 F.2d 298, 304-05 (5th Cir. 1991); United States v. Michaud, 860 F.2d 495, 500 (1st Cir. 1988); United States v. Meyer, 808 F.2d 1304, 1306 (8th Cir. 1987); United States v. Ashfield, 735 F.2d 101, 106-07 (3d Cir.), cert. denied, 469 U.S. 858 (1984); United States v. Samara, 643 F.2d 701,703-04 (10th Cir.), cert. denied, 454 U.S. 829 (1981). 12 5. Making false exculpatory statements to agents or causing them to be made. United States v. Chesson, 933 F.2d 298, 304-05 (5th Cir. 1991); United States v. Frederickson, 846 F.2d 517, 520-21 (8th Cir. 1988); United States v. Walsh, 627 F.2d 88, 92 (7th Cir. 1980).

Destroying, throwing away, or “losing” books and records.

– United States v. Chesson, 933 F. 2d 298, 304-05 (5th Cir. 1991); United States v. Walker, 896 F.2d 295 (8th Cir. 1990); United States v. Conforte, 624 F.2d 869, 875-76 (9th Cir.), cert. denied, 449 U.S. 1012 (1980); United States v. Garavaglia, 566 F.2d 1056, 1059-60 (6th Cir. 1977).

Making or using false documents, entries in books and records, or invoices.

– United States v. Chesson, 933 F.2d 298, 304 (5th Cir. 1991); United States v. Walker, 896 F.2d 295, 297-300 (8th Cir. 1990). This includes backdating documents such as receipts and contracts to gain a tax advantage. United States v. O’Keefe, 825 F.2d 314, 318 (11th Cir. 1987); United States v. Drape, 668 F.2d 22, 25-26 (1st Cir. 1982).

Keeping a double set of books.

– Spies v. United States, 317 U.S. 492, 499 (1943); United States v. Daniels, 617 F.2d 146, 148 (5th Cir. 1980).

Placing property or business in the name of another.

– United States v. Brooks, 174 F.3d 950, 954-55 (8th Cir. 1999); United States v. Daniel, 956 F.2d 540, 543 (6th Cir. 1992); United States v. Peterson, 338 F.2d 595, 597 (7th Cir. 1964), cert. denied, 380 U.S. 911 (1965); United States v. Woodner, 317 F.2d 649, 650 (2d Cir.), cert. denied, 375 U. S. 903 (1963).

Extensively using currency and cashier’s checks.

– United States v. Daniel, 956 F.2d 540, 543 (6th Cir. 1992); United States v. Holovachka, 314 F.2d 345, 357-58 (7th Cir.), cert. denied, 374 U.S. 809 (1963); Schuermann v. United States, 174 F.2d 397, 398 (8th Cir.), cert. denied, 338 U.S. 831 (1949).

Spending large amounts of cash which could not be reconciled with reported income or engaging in surreptitious transactions using cash, money orders, or cashier’s checks.

– United States v. Kim, 884 F.2d 189, 192-93 (5th Cir. 1989); United States v. Skalicky, 615 F.2d 1117, 1120 (5th Cir.), cert. denied, 449 U.S. 832 (1980); United States v. Holladay, 566 F.2d 1018, 1020 (5th Cir.), cert. denied, 439 U.S. 831 (1978); United States v. Mortiner, 343 F.2d 500 (7th Cir.), cert. denied, 382 U.S. 842 (1965).

Holding bank accounts under fictitious names.

– United States v. Ratner, 464 F.2d 101, 105 (9th Cir. 1972); Elwert v. United States, 231 F.2d 928, 936 (9th Cir. 1956).

Handling one’s affairs to avoid making the usual records required for such transactions.

– United States v. Dowell, 446 F.2d 145, 147-48 (10th Cir.), cert. denied, 404 U. S. 984 (1971); Gariepy v. United States, 189 F.2d 459, 461-63 (6th Cir. 1951).

General educational background and experience may be considered as bearing on a taxpayer’s ability to form a willful intent.

– United States v. Smith, 890 F.2d 711, 715 (5th Cir. 1989)(entrepreneurial experience); United States v. Segal, 867 F.2d 13 1173, 1179 (8th Cir. 1989)(successful and sophisticated businessman). See also, United States v. Tarwater, 308 F.3d 494, 506-07 (6th Cir. 2002); United States v. Coblentz, 453 F.2d 503, 505 (2d Cir. 1972); United States v. Ostendorff, 371 F.2d 729, 731 (4th Cir.), cert. denied, 386 U.S. 982 (1967).

The defendant’s attitude toward the reporting and payment of taxes generally.

– United States v. Hogan, 861 F.2d 312, 316 (1st Cir. 1988); United States v. Stein, 437 F.2d 775 (7th Cir.), cert. denied, 403 U.S. 905 (1971); United States v. O’Connor, 433 F.2d 752, 754-755 (1st Cir. 1970), cert. denied, 401 U.S. 911 (1971).

Ignorance of law and claims that tax laws are not constitutional.

– Cheek v. United States, 498 U.S. 192, 199-201 (1991); United States v. Pensyl, 387 F. 3d 456, 458-60 (6th Cir. 2004), and United States v. Hancock, 231 F. 3d 557, 561-62 (9th Cir. 2000).

Avoid Evasion Risks with IRS Offshore Disclosure

It is human nature to want to avoid making a proactive submission to a government agency such as the IRS before the IRS ever discovers the non-compliance. But, typically that is the best path forward.

Moreover, if you realize you are out of compliance and begin researching online, you may begin to feel as though it is hopeless.  Some of these attorneys and CPAs make it appear that everyone with unreported assets or income is going to be severely penalized and shipped off to prison.

That is simply not the case.

You have options, and depending on the facts and circumstances of your situation, your options may include the streamlined program, reasonable cause, or the delinquency procedures – which may result in significantly reduced fines and penalties (and may even receive a penalty waiver).

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm for assistance.