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.