Tax Crimes -- the Role of the Lie (6/20/09)

In several prior blogs I have asserted that tax crimes -- particularly tax shelter crimes -- are about the lie. Some who have read the Title 26 criminal tax provisions and the common Title 18 provisions used in prosecutions of what are at the core tax crimes will not find the word lie mentioned. Some of the tax crimes do require a lie via false statement under penalty of perjury (tax perjury, §7206(1) or false document (aiding and assisting, §7206(2)), but as I develop in this blog, the lie is the common feature critical for proscution of tax crimes even where the text of the criminal provision does not have some similar meaning.

I divide the universe of the crimes usually charged in tax crimes into two categories as follows:

1. Crimes in which the statute's text requires that the defendant act "willfully." The principal tax crimes in this category are evasion (§7201), tax perjury (§7206(1), aiding and assisting (§7206(2)), willful failure to collect and pay over (§7202), and willful failure to file (§7203).

2. Crimes in which the statute's text does not require that the defendant act "willfully." The principal tax crimes in this category are tax obstruction (§7212) and the tax defraud conspiracy, commonly referred to as the Klein conspiracy (18 U.S.C. §371). Both of these crimes apply if the defendant impaired or impeded the lawful functioning of the IRS. (These crimes may apply beyond this context (e.g., threats against IRS employees), but impairing or impeding the lawful functioning of the IRS is the usual context in the cases and can apply to all those actions that are intended to do impair or impede without involving any actual harm or threats of harm.)

Willfully is a term of art meaning that the defendant intended to violate a known legal duty. Ignorance of the law is an excuse. Willfully requires that the defendant know the law and intend to violate the known law. (There is a separate predicate issue in the criminal tax law as to whether a law is knowable, i.e., sufficiently certain in its legal application that it sets a standard to which a person can be held for criminal purposes, but I forego any discussion of that knowability issue here.)

How does the Government prove that a defendant intended to violate the law? Rare is the case that the defendant has admitted in emails or otherwise that he or she knew the law and intended to violate it. Usually, the Government proves some form of lie with the inference that the defendant told the lie because he or she knew the law and needed to lie to assist in the implementing the intent to violate the law. I have discussed this role for the lie -- the big lie -- in the context of the Daugerdas and KPMG indictments where the promoters insisted that the taxpayers make representations about their nontax business purpose that the Government asserts that the indicted promoters knew were not true. The need for the allegedly false representations -- the lie -- was the perceived and actual tax law requirement that the tax benefits worked only if the participating taxpayer had a nontax business purpose. That representation was a lie, and the promoter-defendants knew it was a lie and played their roles in the tax evasion anyway. All tax crimes -- certainly those requiring willfulness -- have some lie as the central feature permitting a jury to draw an inference of intentional violation of a known legal duty.

Tax crimes in which "willfully" is not imposed as a textually stated element of the crime (category 2 above) have parallel elements that are interpreted to function much the same as the willfully element. Specifically, tax obstruction and the Klein conspiracy, as intepreted, require that the defendant act deceitfully. I have discussed this proposition in detail in my forthcoming article John A. Townsend, Tax Obstruction Crimes: Is Making the IRS’s Job Harder Enough?, 9 HOUS. BUS. & TAX L.J. 260 (2009) which will be made available online here.

Thus, the lie is the key feature of the crime in each tax crimes case and is the centerpiece of the Government's case. As it has recently been reported, a chief Government prosecutor asserts that steering clear of "lying, cheating, and stealing" will avoid prosecution. In my analysis, cheating and stealing are the ends and lying is the means. Proving the lie shows conduct that might otherwise be equivocal in terms of intentional violation of a known legal duty to be cheating and stealing and thus a violation of a known legal duty.