Tax Avoidance is Not Tax Evasion

by Robert Barnes 


As the Internal Revenue Manual itself recognizes and respects, “Avoidance of taxes is not a criminal offense. Any attempt to reduce,avoid, minimize, or alleviate taxes by legitimate means is permissible.” Indeed, one who “shapes and preplans events to reduce or eliminate tax liability” is not engaged in a criminal offense where they do not “conceal or misrepresent.” Internal Revenue Manual (12-­‐16-­‐2011). At all times, a “good faith belief that one is not violating the law” negates any criminal intent and precludes criminal prosecution. Internal Revenue Manual (05-­‐19-­‐1999). 

Indeed, there must be conduct that “involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events or to make things seem other than they are” before any claim of evasion can be made. See Internal Revenue Manual (05-­‐15-­‐2008).  This “affirmative act” requirements compels a finding of a double set of books, false entries in the books, destroying books, concealing sources of income, and conduct that must be intended to and likely effect misleading or concealment. See Internal Revenue Manual (05-­‐15-­‐2008). Equally, as the Service itself acknowledges, “mere understatement of income and the filing an incorrect return does not in itself constitute a willful attempt to evade tax.” See Internal Revenue Manual (05-­‐15-­‐2008).

As the IRS’ own fraud handbook proscribes, “for fraud to be considered” the IRS agent “must show an additional tax due and owing,” that the “additional tax due and owing” is “due to a deliberate intent to evade tax,” and the “willful and material submission of false statements with a return.” Internal Revenue Manual (5) (12-­‐16-­‐2011). The handbook declares its express purpose as a “comprehensive guide for IRS employees service-­‐wide in the recognition and development.” Internal Revenue Manual (2) (12-­‐16-­‐2011).  As the IRS defines fraud, “fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, resulting in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from  someone else through deceit.” Internal Revenue Manual (1) (07-­‐ 18-­‐2008). As the IRS’ own directives guide “Tax fraud requires both a tax due and owing; and fraudulent intent.” Internal Revenue Manual (2) (07-­‐18-­‐2008). Equally, there is no willful intent to defraud unless there is “an intentional wrongdoing with the specific purpose of evading a tax believed by the taxpayer to be owing.” Internal Revenue Manual (1)(I) (07-­‐18-­‐2008). Notably, when evaluating criminal intent, the agent must consider “normal industry practices.” See Internal Revenue Manual (3) (10-­‐05-­‐2007).

Notably, a “criminal tax deficiency’ is not the same as any alleged civil tax deficiency; a “criminal tax deficiency” is “only against the tax deficiency that results from fraud.” See Internal Revenue Manual (01-­‐06-­‐2009). Notably, “adjustments of a controversial or offsetting nature may not be included in a criminal tax computation” just as ‘adjustments of a minor, technical or non-­‐fraudulent nature may be considered solely for civil purposes.” See Internal Revenue Manual   (01-­‐06-­‐2009). Coequally and concomitantly, “evidence that may not meet the burden of proof necessary in a criminal investigation” should be reserved solely for civil cases. See Internal Revenue Manual (01-­‐06-­‐2009).

In sum, the criminal tax deficiency can only be for amounts that evidence beyond a reasonable doubt shows resulted from fraud and not from a controversial tax matter or minor, technical or non-­‐fraudulent actions. See Internal Revenue Manual (01-­‐06-­‐2009).

The comments of United States Attorneys Manual, in section 9-­‐27.230, also stress the importance of not wasting resources through prosecuting “inconsequential cases or cases in which the violation is only technical.” This especially applies in tax cases.

An example of “such non-­‐criminal approaches” includes available “civil tax proceedings” (USAM 9-­‐27.250). After all, embarrassing results litter the misguided attempt to treat civil tax disputes as criminal. See e.g., United States v. Larry WilliamsUnited States v. Carolynne TilgaUnited States v Helio CastronevesUnited States v. Stephen SquireUnited States v. BoulwareUnited States v. Garber; United States v. Critzer; United States v. D’Agostino. (In full disclosure, Barnes Law, and its associated counsel and team members, were involved in almost all of those successful cases against the IRS). 

Any ambiguity in tax deficiency provides independent grounds for dismissal (United States v. Garber, 607 F.2d 92 (5th Cir. 1979 (en banc) (if a tax deficiency is debatable, then no crime as a matter of law); (United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974) (same). The reasoning behind this policy is that any other approach “would advocate convicting an unsophisticated taxpayer who failed to get expert advice.”          Garber, supraat 98. This further conforms to the declination recommendation of the manual where non-­‐criminal means of punishment are available. 

For example, in Boulware v. United States, 552 U.S. 421 (2008), the U.S. Supreme Court held that contemporaneous intent is irrelevant to whether return-­‐of-­‐capital treatment was available to defeat tax deficiency element of criminal charges. The court reiterated that tax evasion “cannot stand in the absence of proof of a deficiency.” Id. at 424. The issue of a tax deficiency for criminal purposes “requires a reminder” that such tax deficiency determinations “turn on the objective economic realities of a transaction rather than the particular form the parties employed” and even the prior “following a devious path” does not tender a “different result.” 552 U.S. 421, 429 (2008).

This conforms to “tax law’s economic realism” and the right to structure one’s affairs to minimize tax as the law allows and Congress incentivizes. Id. at 431. These are often “facts wholly independent of intent.” Id. Of course, this does not relieve the government of the additional burden and obligation to prove willfulness. The requirement of a tax deficiency is measured by substance not form, and, “without the deficiency there is nothing but some act expressing the will to evade.” Id. at 433. However, under 7201, acting on bad intentions alone is not punishable. Id.

A knowledgeable IRS defense lawyer can assert, help enforce, and guard your rights in the IRS criminal investigation process at many stages of the case before it gets too far. While the past cannot guarantee the future, it is a resume worth knowing when choosing your tax defense lawyer. Barnes Law enjoys a 90% success in preventing the government from imprisoning its clients even when only hired after a fraud audit or IRS criminal investigation has commenced, while protecting your privacy in the process and limiting the amount of fines, fraud penalties, tax and interest the IRS can charge. Barnes Law is often the best investment you will ever make. Choose wisely: your freedom, your future, and your finances often depend upon it.