Can Tax Evasion be a Felony & Misdemeanor?

Is Tax Evasion a Felony or Misdemeanor?

Is Tax Evasion a Felony?

Tax Evasion is a Felony under IRC 7201. Sometimes, attorneys will refer to a 7203 violation as misdemeanor tax evasion, but it is not tax evasion per se. While some of the IRS and DOJ violations under IRC Section 7203 are similar (and comparable) to tax evasion, the statute does not use the term tax evasion. We will summarize why is Tax Evasion a Felony and if it can ever be considered a misdemeanor.

How is Tax Evasion Defined?

Tax Evasion is defined in IRC 7201.

IRC 7201 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.”

As provided by the DOJ Criminal Tax Manual

• • • “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 is Willfulness?

When it comes to the crime of tax evasion, it requires willfulness. And, in the criminal arena, willful means intentional. This is different than the concept of willfulness in the civil context of a violation, which may include willful blindness or reckless disregard.

As provided by the DOJ Criminal Tax Manual

• • • “Willfulness has been defined by the courts as a “voluntary, intentional violation of a known legal duty.” Cheek v. United States, 498 U.S. 192, 200-01 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 360 (1973). Therefore, in order to establish willfulness, the government must establish that the defendant was aware of his or her obligations under the tax laws.

    • See United States v. Bishop, 264 F.3d 535, 546 (5th Cir. 2001); United States v. Buford, 889 F.2d 1406, 1409 (5th Cir. 1989); United States v. Conforte, 624 F.2d 869, 875 (9th Cir. 1980); United States v. Peterson, 338 F.2d 595, 598 (7th Cir. 1964). As the Seventh Circuit Court of Appeals has stated, there must be “proof that appellant knew he was violating a ‘known legal duty.’” United States v. Fitzsimmons, 712 F.2d 1196, 1198 (7th Cir. 1983).”

    • “Notwithstanding the alternative methods of proving willfulness set forth in Powell, the fact remains that the Supreme Court has definitively and unequivocally defined willfulness as the “voluntary, intentional violation of a known legal duty.” Thus, the government should never rely on any “alternative method” of proof that does not establish the defendant’s voluntary and intentional violation of a known legal duty. Similarly, juries should always be instructed that it is the government’s burden to prove that a defendant acted voluntarily and intentionally and violated a known legal duty.”

Misdemeanor Version of Evasion

While IRC 7201 is a felony, section 7203 is a misdemeanor.

IRC 7203 

• • • “Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.

    • In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure.

    • In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”

IRC 7203 Misdemeanor 

Generally, a violation of IRC 7203 is not necessarily tax evasion. That is because 7201 specifically uses the word evasion, where as 7203 does not  as in:

• • • “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”

 Section 7203 does not explicitly provide that a violation results in tax evasion and is more general in nature.

Therefore, while a person may commit a tax crime that is similar to evasion under 7203, Evasion would fall under 7201.

Stated another way, if a person is convicted for a misdemeanor under 7203, it would not mean per se that they committed tax evasion and thus referring to it as misdemeanor tax evasion (as some cases have done) is not entirely accurate.

Willfulness in Felonies and Misdemeanors

As provided by the DOJ Criminal Tax Manual

• • • “Note that, while some tax crimes are felonies (e.g., 26 U.S.C. § 7201, attempt to evade or defeat a tax), and others are misdemeanors (e.g., 26 U.S.C. § 7203, failure to file an income tax return), the word “willfully” has the same meaning for both misdemeanors and felonies. Pomponio, 429 U.S. at 12. The Supreme Court, in United States v. Bishop, 412 U.S. 346 (1973), rejected its previous holdings that willfulness does not have the same meaning in felony and misdemeanor cases, holding that the willfulness requirement in either class of offense is the same – “a voluntary, intentional violation of a known legal duty.” Bishop, 412 U.S. at 356-61.”

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