Pg 88 109 Crimes Against the Community and Institutions 12 1 Understanding White Collar Crime 12 2 Tax Evasion At common law a corporation could not be held liable for criminal activity This is because most crimes required the element of mens rea at the time of commission or omission since corporations do not have minds it was virtually impossible under common law to hold corporations accountable for their misdeeds Instead individuals acting on behalf of the corporation were indicted o In modern times however legislatures have been adopting statutes that allow corporations to be penalized for white collar criminality Tax evasion also called tax fraud is the willful attempt to avoid paying legally due taxes Tax evasions generally involves three elements o The existence of a tax deficiency o An affirmative act constituting an evasion or attempted evasion of a tax o Willfulness in the commission of the affirmative act The element of willfulness indicates that tax evasion is a specific intent crime To obtain a conviction for tax evasion the government must prove all three elements of the tax offense beyond a reasonable doubt Existence and Proof of a Tax Deficiency A tax deficiency exists when the proper amount of tax to be paid is greater than the amount shown on a taxpayer s tax return o Most courts require proof of deficiencies of any size but others require that the deficiency be substantial To prove the existence of a tax deficiency the government must show the following o The defendant received income in addition to what was reported o The unreported income was taxable The burden of the second element does not fall on the prosecution if it can prove a deficiency with direct evidence Direct Evidence Using direct evidence to prove a tax deficiency involves examining and searching through the defendant s records for all taxable income then comparing it to the tax return filed o This procedure is commonly known as the specific items method because it requires the government to produce evidence of specific items of reportable income that do not appear or appear in a diminished amount on the defendant s income tax returns Although the use of direct evidence is the ideal way to prove a tax deficiency it is often extremely difficult to obtain such evidence in criminal tax offense trials o Obtaining direct evidence depends on the taxpayer s retaining all records of income and a defendant who intends to evade paying income taxes is likely to conceal the existence of any unreported income not retain it Circumstantial Indirect Evidence Three main indirect methods of proving a tax deficiency o Net Worth Method which requires the government to establish that during the year for which the defendant is accused of evading taxes the defendant s net worth increased by more than what it reflected on his or her income tax return for that year A persons net worth is the value of everything owned assets less the total amount owed debts o Cash Expenditures Method in which the prosecution establishes to a reasonable certainty that the expenditures the defendant made within the fiscal year under examination exceed the amount of income reported on his or her tax return o Bank Deposits Method in which the prosecution merely examines the deposits the defendant made into a bank account of the deposits exceeds the amount reported on the income tax return the excess is presumed to be unreported income Affirmative Act The second element that generally must be satisfied to obtain a conviction of tax evasion is that the accused must have performed an affirmative act toward the evasion or attempted evasion of taxes This is a critical element because it can make the difference between conviction of a felony and a misdemeanor o Although performing an affirmative act toward the evasion of taxes constitutes a felony mere neglect to file a tax return or pay required taxes results in a misdemeanor conviction Examples of affirmative acts for purposes of tax evasion are o Filing false tax returns o Keeping a double set of books o Concealing assets o Placing assets in the name of a third party o Lying to IRS agents Many courts including the U S Supreme Court have held that any practice designed to mislead the government or to conceal funds or income can be categorized as an affirmative act Some courts hold that if the government can show a pattern of failure to file tax returns this pattern of omissions might be collectively viewed as an affirmative act in an attempt to evade taxes Willfulness Willfulness for tax evasion purposes is the voluntary intentional violation of a known legal duty that is the taxpayer knows that he or she should have reported more income than he or she actually did It is required by both the felony and misdemeanor tax statutes and there is no difference in the definition of the word willful when it is used in either statute o The main issue is what state of mind or mens rea must be shown to satisfy this willfulness requirement To prove willfulness the government must show that o The law imposed a duty on the defendant o The defendant knew of this duty o The defendant voluntarily and intentionally violated this duty In other words if the government can establish that the defendant was aware of his or her legal duty as a taxpayer the willfulness requirement is satisfied Conversely if the defendant was unaware of his or her duty then the willfulness requirement is not satisfied Unlike other crimes the Supreme Court has established that ignorance of the law is defense when it comes to tax evasion o The court noted that tax laws are extremely complex and difficult to understand Defenses Cash Hoard Defense This defense attacks the showing of a tax deficiency by asserting that although there may seem to be a tax deficiency in actuality the alleged unreported income is not taxable for some reason o Taxpayers often claim that they had save up cash on hand Defense Against the Element of Willfulness The government must show that the act or omission of tax evasion was done with an awareness of its illegality o Therefore even if the defendant s good faith lack of knowledge or awareness is objectively unreasonable the government s burden of proof is not satisfied Third Party Defense Defense Against the Element of Affirmative Act This defense shifts the blame of the alleged evasion to a third party such as an accountant or attorney 12 3 False Advertising Like tax evasion false advertising can be a violation