Tuesday, September 27, 2011

The Willfulness Element of Tax Crimes (9/27/11)

A commenter to one of my other blog entries mentioned the excellent article in today's Wall Street Journal - Gary Fields and John R. Emshwiller, As Federal Crime List Grows, Threshold of Guilt Declines (WSJ 9/27/11), here. The article is a good introduction for afficioinados to the range of general criminal intent requirements:
For centuries, a bedrock principle of criminal law has held that people must know they are doing something wrong before they can be found guilty. The concept is known as mens rea, Latin for a "guilty mind."

This legal protection is now being eroded as the U.S. federal criminal code dramatically swells. In recent decades, Congress has repeatedly crafted laws that weaken or disregard the notion of criminal intent. Today not only are there thousands more criminal laws than before, but it is easier to fall afoul of them.

As a result, what once might have been considered simply a mistake is now sometimes punishable by jail time.

* * * *

Over time, lawmakers have devised a sliding scale for different crimes. For instance, a "willful" violation is among the toughest to prove.

Requiring the government to prove a willful violation is "a big protection for all of us," says Andrew Weissmann, a New York attorney who for a time ran the Justice Department's criminal investigation of Enron Corp. Generally speaking in criminal law, he says, willful means "you have the specific intent to violate the law."
Willful is the level of mens rea required for most tax crimes and, not coincidentally, for the FBAR crime as well.  Indeed, in a topical context, criminal tax lawyers advising clients with undeclared offshore accounts will as virtually the first order of business address the issue of the clients' exposure under this willfulness element and, depending upon the willfulness assessment and the clients' risk tolerances, advise clients of alternatives other than voluntary disclosure under the special program, general voluntary disclosure or quiet disclosure. And, although there are crimes marshaled in a tax setting that do not have a textual "willful" requirement (e.g., Klein conspiracy and tax obstruction), the mens rea elements for those crimes may approach something like willfulness even if not quite getting there. See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255, 277-314 (2009), here. However, in the blog today, I focus on the willful element that applies to most tax crimes. I have cut and pasted (with slight modifications) an introduction to the concept from my Federal Tax Crimes book (footnotes omitted for the sanity of the reader):
C. Willfulness, Mens Rea and the Guilty Mind.

Crimes in Anglo-American jurisprudence have generally required both an act deemed antisocial -- often called the actus reus – and a culpable mental state – often called mens rea. I focus here on the culpable mental state. Mens rea is a broad concept that is far too complex for development in this course, but students of federal tax crimes must be aware of the general concept and its specific implementation for tax and related crimes.

The principal mens rea element of federal tax and related crimes appears in the general requirement that the defendant act “willfully.” In a leading tax case, United States v. Bishop, 412 U.S. 346, 361 (1973), the Supreme Court said:
The Court's consistent interpretation of the word “willfully” to require an element of mens rea implements the pervasive intent of Congress to construct penalties that separate the purposeful tax violator from the well-meaning, but easily confused, mass of taxpayers. Until Congress speaks otherwise, we therefore shall continue to require, in both tax felonies and tax misdemeanors that must be done “willfully,” the bad purpose or evil motive described in Murdock, supra.
Consider the following from the Supreme Court’s decision in Bryan v. United States, 524 U.S. 184 (1998), involving a federal firearm licensing statute which made it a crime to “willfully” deal in firearms without a federal license:
The word “willfully” is sometimes said to be “a word of many meanings” whose construction is often dependent on the context in which it appears. See, e.g., Spies v. United States, 317 U.S. 492, 497 (1943). Most obviously it differentiates between deliberate and unwitting conduct, but in the criminal law it also typically refers to a culpable state of mind. As we explained in United States v. Murdock, 290 U.S. 389 (1933), a variety of phrases have been used to describe that concept. As a general matter, when used in the criminal context, a “willful” act is one undertaken with a “bad purpose.” In other words, in order to establish a “willful” violation of a statute, “the Government must prove that the defendant acted with knowledge that his conduct was unlawful.” Ratzlaf v. United States, 510 U.S. 135, 137 (1994).
In response to Bryan’s argument that “willfully” should be interpreted consistently with the interpretation of the term used in the federal tax laws, the Court said (emphasis supplied):
In certain cases involving willful violations of the tax laws, we have concluded that the jury must find that the defendant was aware of the specific provision of the tax code that he was charged with violating. See, e.g., Cheek v. United States, 498 U.S. 192 (1991). Similarly, in order to satisfy a willful violation in Ratzlaf, we concluded that the jury had to find that the defendant knew that his structuring of cash transactions to avoid a reporting requirement was unlawful. See 510 U.S. at 138, 149. Those cases, however, are readily distinguishable. Both the tax cases and RatzlafRatzlaf is not present here because the jury found that this petitioner knew that his conduct was unlawful.
As the Court noted, “willfulness” has variant meanings, but in part pertinent here the Courts seem to discuss two categories that highlight its meaning in a tax sense. The first category of willfulness crimes requires the 
defendant to have known that his actions were in some way unlawful. [H]e need not have known of the specific statute, but rather he must have acted with the knowledge that he was doing a “bad” act under the general rules of law. Under this intermediate level of criminal common law willfulness, “the Government must prove that the defendant acted with knowledge that his conduct was unlawful.”
The second category
requires that the defendant knew the terms of the statute and that he was violating the statute. The courts have reserved this category to limited types of statutory violations involving “complex” statutes – namely those governing federal tax law and anti-structuring transactions.
Under this rare exception (which covers our * * * “strictest” level of criminal willfulness), a defendant must know the specific law that he is violating in order to act willfully. The “highly technical” exceptional statutes to which the Court in Bryan refers are federal tax laws, for which the Court has explicitly “carv[ed] out an exception to the traditional rule” that ignorance of the law is no excuse. . . .
The Ninth Circuit recently stated the criminal statutory categories slightly differently:
The Supreme Court's jurisprudence in this area has evolved over time, but now appears to establish two standards, one higher than the other, for “willfulness” in the criminal context. In the context of criminal statutes, the word "willful" generally indicates a requirement of specific intent. As a general matter, when used in the criminal context, a “willful” act is one undertaken with a “bad purpose.” Said otherwise, in order to establish a “willful” violation of a statute, the Government must prove that the defendant acted with knowledge that his conduct was unlawful. But in a context involving highly technical statutes that present the danger of ensnaring individuals engaged in apparently innocent conduct, the Supreme Court has suggested that “willfulness” requires the government to prove that the defendant acted with specific intent to violate a known legal duty.
Now, on the second category – specific intent to violate a known legal duty. You will recall that, in Bryan, the Supreme Court said that that standard required in tax cases that the Government prove the defendant was “aware of the specific provision of the tax code that he was charged with violating.” Did the Supreme Court really mean that? The answer is no, as exemplified in a recent case from the Ninth Circuit (an answer that must be the right one). In discussing the cases upon which Bryan relied for the statement (Cheek and Ratzlaf), the Ninth Circuit said:
Neither of these cases, however, required the government to prove the defendant's knowledge of a specific provision of law. In Cheek, the Supreme Court held that “willfulness,” as used in the criminal provisions of the tax code, required the government to prove that the defendant knew of the legal duty to file an income tax return and to treat his wages as income. But the Court noted that the “jury would be free to consider any admissible evidence from any source” showing that the defendant was aware of this duty. While Cheek listed “awareness of the relevant provisions of the Code or regulations” as one source of such evidence, it did not identify it as the exclusive source. Similarly, Ratzlaf held that the government could not carry its burden to prove the "willfulness" requirement in a prosecution for illegal structuring of financial transactions merely by proving that the defendant knew of the bank's duty to report cash transactions of more than $ 10,000. Nevertheless, the government did not have to prove that the defendant was aware of the provision of the federal statute that made it illegal to structure his cash deposits to avoid triggering the bank's reporting obligation. It was sufficient if a jury could reasonably conclude that the “defendant knew of his duty to refrain from structuring," a conclusion which could be based on "reasonable inferences from the evidence of defendant's conduct.” Similarly, prior to Cheek and Ratzlaf, we indicated that "willfulness" under a complex anti-exportation statute required proof of "a voluntary, intentional violation of a known legal duty," but we considered this standard satisfied where the government proved “that the defendant [knew] that his conduct . . . is violative of the law.” These cases make clear that even in the context of “highly technical statutes that presented the danger of ensnaring individuals engaged in apparently innocent conduct,” the term “willfulness” requires the government to prove that the defendant was aware of the legal duty at issue, but not that the defendant was aware of a specific statutory or regulatory provision.


  1. A simple example for tax related case,

    Immingrants (most of them) may have money left (have sent back) in their home countries. It is for all kinds reason. They pay local tax (for example in China, it is flat 20%).

    They do not report interests income from these accounts in their US return. It is tax non-compliance for sure, but given they most likely enjoy low tax rate in US (being not so rich), they may not have any financial gain for keeping money offshore, also, if they know how to claim foregin tax credit, that may even offset any tax in US at all.

    If they are being prosecuted for tax evasion (which under US tax law, they do), where is the criminal intent other than being stupid ?

  2. ij -- bear in mind that most other countries tax only on source income from that country, so its quite possible that (depending on income in that country, and that country's tax rate), a person could be in a much lower tax bracket in that country. Even in China, a 20% tax is lower than US rate of 35%.

  3. In case of India, I believe first $2000 (basic exemption) or so is not taxable. So for some of us who had joint account with parents interest income less than exemption amount was tax free.

    This whole OVDI has taken a huge emotional toll on my family for mere $2500 tax due in 5 years. I have already paid taxes in 6 digits over 5 years.

    My parents feel that I am in trouble because of them putting money in joint accounts with the intention of helping me out in future(inheritance). The bought generous life insurance policy for me when I was a kid. They invested money in my name so that I can get good education. Fortunately, I didn't need that money as I got scholarship in the U.S. and that money was left as is in joint accounts.

    None of it is money earned by me, its all parents life earnings sitting in an account that has me as one of the signatory authority.

    Ever since my father learned about this issue, his health has been degrading. Sometimes I just wonder whether it was worth coming to the land of opportunities at the cost of health of loved ones and loosing their life earnings for an ignorant mistake.

    Well, life is not fair !

  4. "Even in China, a 20% tax is lower than US rate of 35%."

    You are right, but I was talking about low income immigrants, I, myself have always been in 15% rate on federal return. So, if there is no state tax involved, there is no gain from "evading tax".

    Of course, it is not as simple as it seems to be, what if offshore country offers high rate say 10%, vs 2% in US, plus exchange rate when US$ is down, so there is cap gain.

    My assumption is when no obvoius financial gain for the taxpayer, where is the criminal intent ?

  5. Anon6000,
    Is there an emailid (anon email id should be fine too) i can reach you?
    In the joint account who is the primary holder?
    Also in India in whose name has the taxes been paid? If it is in your parents name you do have a good case to argue that the funds in these accounts should not be included in the penalty and income calculation.

    Even if you were the primary account holder, if you can provide proof that your parents have funded the account and operated it i would think you still have a valid case for not including the income as well as the asset for FBAR penalty.

    Many of my indian friends are in this situation.
    This is an easy way of setting up inheritance wherein if something happens to the parent the account being joint enables the other holder to access the funds without headaches.

  6. Just a comment on comparing various countries tax rates... You have to compare effective rates, not tax table rates. I am pointing out the obvious and assume everyone should know that, right?

    In the US, last year, our joint effective tax rate (not tax table rate) against a total gross income, (which is more than the 1040 AGI) was a mere 3.5%, after the standard deductions, exemptions, 401 shelters, credits, etc, etc, Nothing fancy. Who can complain about that rate? Really? You see why I have little sympathy with the so called Tea party. We are hardly taxed at all. I am not complaining mind you, but I certainly see why we have such big deficits.

    Now, none of those deductions / credits /exemptions are available to us in the country we currently live. Gross income, is gross income. Period. No concept of an AGI. Over there, our passive interest income last year in our “foreign account” , the tax rate was 19%. And, if we were to actually work there, on their progressive tax scale, we would have paid about 33% vs the 3.5% if we have had the same AGI we had in the states.

    So, to the point, if having funds in a foreign account is tax evasion scheme, as the IRS implies with it's VD programs, it is a pretty stupid crime. If avoiding taxes is the criminal intent that the IRS assumes we were doing, this last year, I would have been avoiding 3% to pay 19%. Pretty dumb, eh?

  7. i have joint account with my mother who is a citizen of India. She had deposited some money in this non repatriable account and sale proceeds from some investment assets also. She is old and hence i am the primary holder. I have not deposited any money in this account from the US. No wire transfers or deposits.
    However i have used money from this account as well as my mom. It is my mothers income but nevertheless i have used the funds.
    Should i need to include this in FBAR penalty? I do not have US funds to pay if i include it. Since this is a rupee account the funds cannot be repatriated easily.
    I was wondering if IRS would accept rupee check.

  8. ij -- this is really a thought on another blog entry (the one about RRSP), but I thought it would be better suited here.

    You said that you did not fill Schedule B at all, and worried that it might indicate willfulness to an IRS examiner. I think its the other way around. If someone filled Schedule B, and did not tick the foreign account question, or ticked it incorrectly, then their position is WORSE than someone who did not file Schedule B at all. It would be much harder for someone to learn of FBAR filing requirement if they did not fill Schedule B.

  9. "You said that you did not fill Schedule B at all, and worried that it might indicate willfulness to an IRS examiner. I think its the other way around."

    I totally agree. However, it is a better chance to be "non willful" but it is still related to "willful avoidance". For example, if a taxpayer file Schedule D to report cap loss (I did in 2000/2001 when I lost my investment due to dotcom crash), that indicates the taxpayer know how to file a return with Schedule for better tax benefit, also the key of this willfulness is that foreign income was not included into income, that would lead impress to avoid tax for from this avoidance -- criminal intent (if i can say).

    If I can not convince myself I am innocent, how could I expect IRS would give me this pass ?

    Of course, other evidence may support my claim "non willfulness" such as I had a big transaction over $10K as late as in Feb. 2010 from Canad to US. Another one was in 2005 about same amount. Now, I know US bank would notify the Treasury for such a transaction. Would I have done so that if I knew I should file FBAR to report offshore, or if I was trying to hide offshore ?

    I do have a lot evidence to support my "non willfulness" claim other than schedule B.

    I would say most people in OVDI who do not use entity to cover up -- can have a good shot on "non willfulness" claim, particularly Canadians in US.

    According my conversation with CRA (Canada's IRS), they exchange tax related information with IRS all the time. So there is really no hiding place for Canadians who keep money in Canada.

  10. Here what i see the criminal intent for not file Schedule B.

    Canadian bank withhold tax is 10% on interest earning, US federal tax is at 15%, plus state tax 6%

    So, there is a financial gain for not reporting offshore money although misunderstanding on global income reporting on non-US citizen taxpayer that lead most immigrants skip this reporting.

    How to sell this "non willfulness" when there is obvious financial gain ?

  11. Jack, sorry I need to expand a bit more here,

    Someone may ask "why did you think immigrants should not report global income (their home aka offshore accounts earning) in the first place ?"

    Well, here is what I thought, the fundamental fairness in our tax system.

    As an immigrant, I worked two years first at a college where I would be entitled for taking 2 credits course per year at the cost of my employer. So I went to registration, the office told me that I had to pay non-resident fee which is twice as much as the tuition paid by my employer. My employer would not pay for the non-resident fee. This non-resident fee is based on immigration status rather than tax filing status. Sound strange ? My tax (Federal and state) is the same as citizen/green card but my benefit is not.

    Also, I have also offshore responsibility -- offshore child support, offshore child education cost, but I could not get one penny such as child credit/education credit for these expenses.

    Without much of reading what should be in tax law, plus often people talking about US citizens' global income reporting -- naturally, I thought, immigrants offshore little income should be excluded.

    I am not making a legal argument, but just speaking from what has led to this offshore tax non-compliance.

    The bottom line is that we immigrants who have failed to report offshore bank earning is not without moral ground -- that is basic fairness -- equal tax. equal benefit -- am I right ?

  12. ij,

    I am also immigrant on work visa in the U.S. I totally agree with your equal tax, equal benefit belief. We enjoy several benefits that citizens enjoy (infrastructure, quality of life),but there are several other things that can make us ignore foreign income. Here are few that I list

    1)Few years ago, when government announced stimulus for taxpayers, we were not eligible because my wife had ITIN number instead of SSN. She is on dependent visa and hence cannot get SSN (and of course cannot work). By this, one might believe that they are not residents of U.S. as everybody in their circle who has a green card or citizen is getting stimulus checks and we were not.This again made us feel we are non residents and temporary in this country.

    2)Being on work visa, you cannot switch jobs easily or if you are fired, you have to leave country very next day. Though we are taxed at same rate as citizens and green card holders, we don't have any time of staying in this country and find alternatives since visa is tied to employer. This again makes you feel that you are temporary here yet taxed like citizens.

    3)As ij said, we cannot claim non resident parents as our dependants on tax return tough we support them with our income here.

    4)No unemployment benefits if we loose job and no social security benefits if we go back to home country before we get green card(even though we pay for them through taxes)

    5)My wife was told to wait 18 months before she could claim resident status for reduced fees in community college. Those were the months, where I failed to report her meagre foreign bank interest income.

    6)Lastly, sheer ignorance amongst immigrant community about these issues. Many CPAs were clueless (I have talked to a CPA and was told that only NRE Indian accounts need to reported on FBAR!!).

    I have achieved a lot in this country personally and professionally. I understand that nothing is above the law and I have made every effort to comply by joining OVDI. But as they say in my home land, "You need two hands to clap"

  13. "3)As ij said, we cannot claim non resident parents as our dependants on tax return tough we support them with our income here."

    I am not aware there is parents credit, i am talking about child credit. I have claimed for supporting my US born kids but not my offshore kid (whom i left behind due to moving to US).

    This is of course not an excuse for failing to include offshore accounts, rather it is what have had led to believe immigrants' offshore rightfully excluded.

  14. ij,

    Search for "qualifying relative".

    Best info I could find was

  15. Anon6000,

    Thanks.. I guess it is under dependent, even kids over 18 who meet certain condition also can be a dependent.

    I know Asian culture does have a very close family tie, I have a friend who is taking care of his 99 years old grandma (his parents passed away already). I think this can also be considered dependent.

    Most immigrants are decent and honest, and they come to this country believe fairness. It is my own observation, it seems a lot Indians in this OVDI. I see this is a sign of true honesty -- once they know the problem, they want to make it right. That is what let me into this program too.

  16. When in Rome do as the Romans.

    -First attested in medieval Latin si fueris Rōmae, Rōmānō vīvitō mōre; si fueris alibī, vīvitō sicut ibi (“if you were in Rome, live in the Roman way; if you are elsewhere, live as they do there”); which is attributed to St Ambrose.

    Think of Congress as a colonial governor. Yes it provides some services, but it takes in more than it provides (and puts it in its pocket). You should protect yourself and your assets from Congress because it does not mind jailing you if you do not give it your money.

    "No man's life, liberty, or property are safe while the legislature is in session."

    - Gideon J. Tucker in Final Accounting in the Estate of A. B. (1866)

    -This is a parody on "No man shall be deprived of the free enjoyment of his life, liberty, or property, unless declared to be forfeited by the judgment of his peers, or the law of the land." from the Magna Carta.

    Second, I question why so many Indians are in the OVDI. You say it is a sign of "true honesty", to "make it right", but I wonder if the (likely unjustified) fear of deportation is a stronger reason.

  17. IRS guiding principle: Fear Works.

  18. "Second, I question why so many Indians are in the OVDI. You say it is a sign of "true honesty", to "make it right", but I wonder if the (likely unjustified) fear of deportation is a stronger reason."

    If they knew offshore under-report were offense that would cause deportation, they would not have done so in the first place.

    Would that alone be enough for "non-willful" argument ?

  19. More than honesty and fear of deportation, it is that a majority of indians are accidental victims.
    Unlike the true UBS tax cheats, in case of majority of indians, funds were transferred to purchase real estate ,for upkeep of family or simply for deposit so that the funds could be used upon return. In some cases it is inheritance from india or legacy assets acquired before coming to the US.

    In case of majority of Indians, had they known about this issue, they could have easily moved the assets in the name of their parents (who would be indian citizens) before coming to the US and then recieved the same as inheritance.
    Unfortunately not many indians are familar with the "international" tax laws and that does not
    help either.

  20. In DOJ press release about Dr. Ahuja


    it says "
    As alleged in the indictment, U.S. citizens have an obligation to report to the IRS on Schedule B of their U.S. Individual Income Tax Return, Form 1040, whether they have a financial interest in, or signature authority over, a financial account in a foreign county in a particular year by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. They further have an obligation to report all income earned from foreign financial accounts on the tax return and to pay the taxes due on that income. Separately, U.S. citizens with a financial interest in, or signatory authority over, a foreign financial account worth more than $10,000 in a particular year, must also file an FBAR form with the Department of the Treasury disclosing such an account by June 30 of the following year. "

    Uninformed immigrants would have believed this whole global income reporting are for the US citizens only ---

    I have seen many of DOJ news release with such a narrow specification on global reporting requirement.

    My whole nondisclosure problem was from this belief, not that I should make an excuse, but that was the truth -- What you read, what you get

  21. "As alleged in the indictment, U.S. citizens have an obligation to report...
    Uninformed immigrants would have believed this whole global income reporting are for the US citizens only ---"

    But think about this for a second. If it says US Citizens, why not accept it as such? If the IRS makes a press release and only mentions US Citizens, what does that tell you? To me it means US Citizens. Particularly those hiding large amounts in Swiss bank accounts. End of press release, end of story.

    Was there an IRS press release about Indian immigrants with joint accounts with Indian citizens parents who are perhaps sick? No.

    Was there an article on the front cover of USA Today about how immigrants must report joint accounts with their aging parents in developing countries or retirement accounts in Canada? No.

    So this to me means that they are targeting a certain group and not targeting immigrants.

    If you go around reading the Tax Code you will find hundreds of tax laws you are breaking and that everyone breaks. There is not much that can be done unless US Congress takes a few years off to clean up the tax code.

    So in a sense you have to play dumb. If most immigrants don't even know enough English to read the IRS press releases, pretend you are one of those immigrants. "Its my parents' money in India, not mine, etc." Or even better: "No comprendo Ingles".

    An indigent immigrant will not make a rich audit target because they can't get much money out of him.

    If you play "smart" and find all the taxes you should have paid, taxes that most IRS agents don't even know exist, never mind most taxpayers, you'll go crazy.

  22. ij,

    I also honestly believed that world wide income was only for US citizens. Again, like you, I am not making an excuse for my under reporting of foreign income.

    This is from publication 17 of IRS (I think this is the one distributed with tax forms)


    Foreign-source income. If you are a U.S. citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

  23. Anon6000,

    IRS assumes we all understand what is a US person.

    So this kind publication when using US citizen instead of US person is to emphasize "US citizens wherever they live", as you read carefully it means more for expat US citizen.

    Then, I did not know "US person" until I read OVDI/FBAR.

    In a way, we misled ourselves more than these publications did.

  24. Jack

    Do you know if the Williams case (the case where the IRS lost the willfulness issue) was appealed to the 4th Circuit by either party, and if so, was the judge's dismissal of willfulness one of the grounds of appeal (by the Government, since Williams would presumably not appeal that) ?

  25. I have not heard of an appeal in the case and think I would have heard something by now if the Government had decided to appeal.

    Keep in mind that the Government, unlike private litigants, takes a more systemic view of whether it will appeal a case. The willfulness finding by the judge was a factual finding that can be upset only if the judge were clearly erroneous. It is not easy for the appellant (here the appellant would be the Government) to clear the clearly erroneous hurdle. That would be a factor mitigating against Government appeal.

    Another factor mitigating against appeal is that the case might be the wrong case for the Government to present on appeal. The Government thus, on the facts and findings of the district court, might have viewed the case as creating a risk of an unfavorable appellate decision that could be far more damaging precedentially than the district court decision.


    Jack Townsend


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