The key concept is that the taxpayer have evaded tax for the crime of tax evasion. Simply because a taxpayer underpaid some or all of his tax liability, does not mean that he evaded some or all of his tax liability. The Supreme Court and other courts, however, have described this element as a "tax deficiency" which is a tax term of art that normally means simply tax underpaid. See Section 6211(a), here.
In his instruction, Judge Pauley describes this element as "tax due and owing." Judge Pauley explains it to the jury as follows (again excluding the portion relevant only to Daugerdas' personal evasion):
First Element: Tax Due and Owing
In order to establish the first element of tax evasion, the Government must prove beyond a reasonable doubt that the relevant taxpayer or the defendant Paul Daugerdas owed a substantial federal income tax for the tax year at issue.This particular quote does not use the term tax due and owing, but rather just requires that there be a substantial federal income tax due. Perhaps, though, the requirement of proof beyond a reasonable doubt captures the concept I want to discuss here.
There are more extensive instructions on tax due and owing and may be reviewed on a prior blog. Daugerdas Retrial Jury Instructions - Part 06 Tax Evasion Instructions Part 1 Tax Evasion and Conspiracy to Commit Tax Evasion (Federal Tax Crimes Blog 11/25/13), here.
In the past, I have typically used the "tax due and owing" formulation of the element. However, in preparing an article on sentencing, I concluded that perhaps the better concept would be "tax evaded." Here is an except from the latest draft of that article which arises from the Villanova Symposium in which I recently participated (footnotes omitted):
E. Tax Liability Concepts in the Criminal Tax Universe.
I stated earlier that tax evaded is the centerpiece of the sentencing in criminal tax cases and, hence, is at the forefront from the earliest steps in the criminal investigation and enforcement process where practitioners must anticipate and, if possible, shape what will happen at sentencing. I will first state generally the varying concepts of tax liability as they play out in the criminal tax context and specifically at sentencing. As with most financial crimes, the key determinant in the advisory Sentencing Guideline calculations is the financial loss to the victim. For taxes, the victim is the IRS, and the tax loss is the measure of the financial loss that is considered.
1. Civil Tax Liability / Tax Deficiency.
A taxpayer may think of his tax liability as what he offers to the IRS. In the case of a filed return, the return is the taxpayer’s offer. In the case of an unfiled return, the taxpayer’s offer is nothing (except to the extent of prepayments such as withholding or estimated taxes). In either case, the IRS may disagree and think the taxpayer owes more than he offered. That is the context for IRS investigations into liability that may include both audits and criminal investigations.
The taxpayer will have a civil tax liability which is imposed on the original due date of the return. That liability is determined before application of payments. To the extent that the liability exceeds the payments made or deemed as of the due date of the return, the taxpayer has an unpaid civil tax liability, often referred to in a civil context as a deficiency. Taxpayers who fully pay their civil tax liability will usually not be at risk of criminal prosecution because of the phenomenon noted above that punishment is determined by evasion of the unpaid tax. At least usually, in the tax crimes universe, if there is no tax underpaid, there is no crime – or at least no crime that the Government will have the incentive to prosecute.
The actual unpaid tax liability – the deficiency as the Code defines it – is not directly the key concept in tax crimes and sentencing. The term deficiency does not describe the tax, if any, a taxpayer intended to evade. It is simply the unpaid tax. The taxpayer may have intended to evade some or all of the deficiency. Unfortunately, the term deficiency is used by many cases to describe the portion of the deficiency that the taxpayer intended to evade – what I call the tax evaded. In order to keep the statutory term of art distinct, I use the term deficiency as used in the statute to mean the unpaid civil tax liability and will use a different term for the portion of the deficiency the taxpayer intended to evade for the reasons I now discuss.
2. The Tax the Taxpayer Intended to Evade – the Criminal Tax Numbers or Figures.
I think it helpful to illustrate the concepts in an example. Assume that, for civil tax purposes, the taxpayer had $100,000 income that he or she failed to report and pay. Assume that the tax liability on that omitted income is $35,000; that liability is the deficiency. The $100,000 omitted income consists of two items -- $50,000 of embezzlement income which the taxpayer knew was taxable and chose not to report and $50,000 of personal injury income which the Government is satisfied that the taxpayer thought or could have reasonably thought was excludable under § 104 but which for technical reasons is not properly excludable under that section. In calculating the tax evaded as an element of tax evasion, the Government will compute the tax only on the $50,000 of embezzlement income and will not include the $50,000 of personal injury income. So, let’s say the tax on $50,000 of embezzlement income is $17,500. The criminal tax number for establishing the evaded tax element in a tax evasion case is $17,500 (even though the deficiency is $35,000). The Government must prove the evaded tax beyond a reasonable doubt.
I need to explain now my use of the term evaded tax. Section 7201 describes the crime of tax evasion as a willful attempt “to evade or defeat any tax imposed by” Title 26. It does not refer to the tax deficiency which, as noted above, has a defined meaning in the Code that is not the same as evaded tax. To be sure, courts – including the Supreme Court – often refer to the evaded tax element as tax deficiency. Because of the different Code meaning of the term tax deficiency, I think use of deficiency for the evaded tax element is confusing. The evaded tax element is sometimes described as the tax “due and owing” – sometimes shorted to just “tax due.” I find this formulation less described of the evaded tax, because just based on the words used it might be interpreted the same as tax deficiency. In this article, I will use the term evaded tax because I think it is more descriptive of the evasion element and because it permits better development of the other concepts I discuss in this article.
Evaded tax is not the tax deficiency which is the civil tax number; it is instead the part of the tax deficiency the taxpayer intended to evade. In the example, the deficiency would include the $50,000 personal injury income, which, let’s say, doubles the tax deficiency to $35,000. The deficiency is never less than the criminal tax number (referred to here as the evaded tax) and often more because of the phenomenon I just mentioned -- i.e., some components entering the deficiency may not be items resulting in evaded tax.
Finally, as I develop in the example, the evaded tax is the portion that would be the element of the crime of tax evasion which is the issue decided in the guilt determination phase before sentencing. This article does not discuss the guilt determination phase, but I think the foregoing example illustrates the conceded of tax evaded for that purpose. The tax evaded concept does carry forward into the sentencing phase via two key concepts – the sentencing tax loss which is the principal driver of the sentence and in restitution.
3. Sentencing Tax Loss.
The Sentencing Guidelines use “tax loss” as the principal component in the advisory guideline sentencing range for a defendant convicted of one or more tax or tax related crimes. The Sentencing Guidelines tax loss is “the total amount of loss that was the object of the offense.” It is the same as the tax the taxpayer intended to evade – “tax evaded” as I use the term. There are some key nuances in the tax loss concept in the Guidelines that may cause the tax loss to exceed the tax evaded number used in the guilt determination phase. First, since sentencing findings (including tax loss) are determined by a preponderance of the evidence rather than beyond a reasonable doubt, the tax loss may include more components than included tax evaded for guilt of the crime of tax evasion. Second, the tax loss can include tax loss for “relevant conduct” – other related crimes for which the defendant was not convicted. The relevant conduct concept is described as the cornerstone of the Guidelines (although consistent with pre-Guidelines sentencing practice) and plays a major role in tax cases where multiple years or events may be involved.
Consider this example. The indictment alleges that the taxpayer evaded $100,000. That means that the prosecutors believe they can prove beyond a reasonable doubt that the taxpayer evaded $100,000. The taxpayer is convicted on that basis. Suppose, however, that the Government can prove by a preponderance of the evidence that the taxpayer really evaded $200,000 but did not allege the additional $100,000 in the indictment because it did not believe that it could prove that additional amount beyond a reasonable doubt. Further, suppose that the taxpayer’s real unpaid civil tax liability for the year is $300,000, with the additional $100,000 representing items for which the Government cannot prove the taxpayer intended to evade under any standard of proof. There are 3 concepts related to the overall unpaid civil tax liability – in the order presented they are: (i) the evaded tax – the “criminal number” -- of $100,000 used for purposes of charging and convicting for evasion; (ii) the sentencing tax loss of $200,000, consisting of the evaded tax of $100,000 proved beyond a reasonable doubt and the evaded tax of $100,000 proved by a preponderance of the evidence; and (iii) the residual tax of $100,000 not related to tax evasion for any criminal purpose (i.e., it solely affects civil tax liability). The three components in the aggregate represent the civil tax liability (or deficiency), whereas only the first two are relevant to the criminal process.
This is a simplified example. As I will note later, there are other concepts that can cause the sentencing tax loss to vary from the tax evaded used in the guilt determination phase. The principal concept is the relevant conduct Guidelines concept that requires or at least permits the sentencing court to include in the base offense calculations criminal conduct for unconvicted crimes. In a criminal tax setting involving income taxes, the relevant conduct is the tax loss from similar evasive conduct in years other than the year(s) in the count(s) of conviction. I used a single year in the example above, but assume that the taxpayer had evasive conduct in three other years and tax loss in the same amount – $200,000 – for each of the years (the one convicted year and the three unconvicted years). The tax loss for those unconvicted years can be included in the tax loss computation regardless of whether (i) the defendant was acquitted of criminal conduct for the unconvicted years, (ii) criminal conduct was charged for the unconvicted years but dismissed pursuant to the plea agreement; or (iii) criminal conduct was never charged for the unconvicted years for whatever reason, including expiration of the statute of limitations. Hence, if three other years involved the same type of conduct, the taxpayer’s tax loss number would be $800,000 rather than $200,000. That makes for a significantly higher sentencing range under the Guidelines. Relevant conduct tax losses to drive up sentencing are frequently encountered in tax cases.
[Restitiution Discussion Omitted]So, it seems to me that tax evaded or evaded tax may be a better term to describe the element. Of course, the use of the term evaded is related to the additional element that the taxpayer have acted willfully. Still, I think the two concepts can be separately stated and understood. That is why I now prefer using the term tax evaded or evaded tax for the element, although I am sure I will not be consistent in that use in the future. (In this regard, note that the link below is to "Tax Due" which originally was shorthand for tax due and owing, but "Tax Due" is too much like deficiency (unless it is limited to tax due provable beyond a reasonable doubt).