Tuesday, May 21, 2013

Can Tax Evasion Be a Misdemeanor? (5/21/13)

I suppose this blog should begin with "Not to put too fine a point on it."  See Grammaphobia blog here.  The object of this blog is Judge Proctor's decision in United States v. Lyerly, 2013 U.S. Dist. LEXIS 67588 (ND AL 5/13/13), here [link to be added later].  The question is whether there is a material difference between tax evasion in Section 7201, here, a felony, and failure to pay criminalized by Section 7203, here, a misdemeanor, beyond just the punishments that make one a felony and one a misdemeanor and the different elements of the two crimes.  Most tax lawyers would be careful to describe Section 7201 as "tax evasion," a term of art limited to Section 7201.  So, is failure to pay in Section 7203, tax evasion albeit of the misdemeanor variety.  So here is Judge Proctors' discussion of the parameters of the terms here:
Defendant has moved the court to amend its previous Order and Memorandum Opinion with regard to three sections. First, Defendant objects to the use of the terms "tax evasion" and "failing to pay" in the first sentence of the second paragraph of the Memorandum Opinion (Doc. #49 at 1). (Doc. #55 at 1).  * * * 
1. Use of the Terms "Tax Evasion" and "Failing to Pay" 
The relevant sentence in the court's previous Memorandum Opinion which Defendant questions states, in full, that: 
Defendant has been charged with three counts of misdemeanor tax evasion under 26 U.S.C. § 7203 for failing to pay his personal income taxes in 2006, 2007, and 2008.
(Doc. #49 at 1) (filed under seal). Defendant objects to the use of the terms "tax evasion" and "failing to pay," both on the ground that they misrepresent the Information. The arguments related to each of these terms are slightly different, so the court will address each term separately. 
First, Defendant argues that use of the term "tax evasion" is inappropriate because Defendant was not charged with felony "tax evasion" under § 7201, but with a misdemeanor violation of § 7203. (Doc. #55 at 1-2). This is a strawman argument. The court did not say that Defendant is charged with felony tax evasion under § 7201, but that he is "charged with three counts of misdemeanor tax evasion under 26 U.S.C. § 7203." (Doc. #49 at 1). The court is well aware that a § 7201 violation is a felony and a § 7203 violation is a misdemeanor. Courts have long distinguished the two by referring to the former as "felony tax evasion" and the latter as "misdemeanor tax evasion." n1 The term "misdemeanor tax evasion" is, of course, a shorthand for "willful failure to file return, supply information, or pay tax in violation of 26 U.S.C. § 7203." To help ensure that a reader might not accidentally read "misdemeanor tax evasion" to mean "felony tax evasion," the court specifically indicated that Defendant was charged with three violations of 26 U.S.C. § 7203. (Doc. #49 at 1).
   n1 See e.g. United States v. Winfield, 960 F.2d 970, 972 (11th Cir. 1992); United States v. Brown, 548 F.2d 1194, 1199 (5th Cir. 1977); United States v. Schafer, 580 F.2d 774, 781 (5th Cir. 1978); United States v. Thompson, 518 F.3d 832, 866 n.18 (10th Cir. 2008).
Defendant  next argues that the Memorandum Opinion incorrectly asserts that he is being prosecuted for wilfully failing to "pay" his taxes when, in fact, the Information charges that he willfully failed to "file" his tax return. n2 (Doc. #55 at 2) (filed under seal). Indeed, Defendant further asserts, he had actually filed and paid his 2005, 2006, and 2007 tax returns on October 13, 2010. (Id.). Defendant's argument does not hold water.
   n2 Whether a person can pay his taxes without filing a tax return is a question the court will leave for philosophers to resolve. 
The Information clearly and explicitly charges Defendant with three violations of 26 U.S.C. § 7203. (Doc. #1 at 1-3). The relevant provisions of the statute state that: 
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... 
26 U.S.C. § 7203 (emphasis added). As the statute makes clear, Defendant is charged with willfully failing to pay his taxes. Furthermore, whether Defendant, in October 2010, paid taxes that were years overdue is irrelevant; he is required by statute to have paid them at the time or times required by law or regulations.
 I avoid the use of the term "misdemeanor tax evasion," because I think it is confusing.  Here is the short discussion I just added as a footnote in my Federal Tax Crimes book:
In this regard, some courts described the § 7203 failure to pay crime as “misdemeanor tax evasion.”  E.g., United States v. Thompson, 518 F.3d 832, 865-866 (10th Cir. 2008).  So long as the misdemeanor description accompanies “tax evasion” when referring to § 7203, I suppose that description is harmless.  I think most practitioners and courts refer to the § 7203 crime as failure to pay (or file, as appropriate) rather an as “misdemeanor tax evasion,” and refer to the crime in §7201 as tax evasion.  In other words, when they say tax evasion, they mean the felony crime of tax evasion and adding felony would be redundant in the common understanding.  So, I think it breeds confusion to speak of the § 7203 offense of failure to pay as “misdemeanor tax evasion.”  In any event, so long as it is clear that § 7203 is being referenced, referring to the crime as “misdemeanor tax evasion” is harmless.  See United States v. Lyerly, 2013 U.S. Dist. LEXIS 67588 (ND AL 2013).


  1. Describing "willful failure to pay taxes" as "misdemeanor tax evasion" is egregious error.
    A "tax evasion" (of payment, as opposed to assessment, for this
    discussion) conviction implies the defendant committed an affirmative
    evasive act. To the contrary, a "failure to pay" tax (even willfully)
    conviction implies the defendant did NOT commit an affirmative evasive
    act, but rather that he refused to act. As a tax crime, one's
    committing an affirmative act of evasion is deemed more harmful to the
    tax system than one's failing to pay a tax. That is why tax evasion is a
    felony, and why willful failure to pay a tax is a misdemeanor. The
    district court should amend its order forthwith.

  2. This is no academic exercise; the district court committed egregious error. A "tax evasion" (for this discussion, of payment rather than of assessment) conviction implies the defendant affirmatively attempted to evade a tax payment. In stark contrast, a "willful failure to pay tax" conviction implies only that the defendant refused (or neglected) to take tax payment action. Our tax system regards one's commission of an affirmative tax evasion attempt as more serious than one's failure to pay a tax. That is why tax evasion is a felony and willful failure to pay tax only a misdemeanor. One is not, as the post implies, a lesser included offense of the other. The district court should revise its order immediately.


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