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What is an “Attempt to Evade or Defeat Tax?”

April 30, 2024


Tax evasion is a serious federal crime. Individual taxpayers convicted of tax evasion can face up to a $100,000 fine and five years of federal imprisonment, while corporate entities can be fined up to $500,000. This raises an important question: What does it mean to “attempt to evade or defeat tax”? Texas tax evasion attorney Lawrence Brown explains:

Tax Evasion Under Section 7201 of the Internal Revenue Code (IRC)

The crime of federal tax evasion is established in Section 7201 of the Internal Revenue Code (IRC). Despite its importance (and the substantial penalties it imposes), Section 7201 is brief—and, as a result, it leaves several critical questions unanswered. Section 7201 states, in full:

“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

There are several critical aspects to the crime of tax evasion under Section 7201. While Section 7201 may not provide many answers itself, other sources of information provide additional insight into when the Internal Revenue Service (IRS) and U.S. Department of Justice (DOJ) can (and are likely to) pursue criminal charges against high-income and high-net-worth taxpayers. Here are some key considerations:

1. “Willfully”

One of the first critical aspects of Section 7201 is that it applies specifically to “willful” conduct. As the IRS explains, willfulness “is the intentional, purposeful, deliberate act to hide income or assets and therefore evade filing requirements or payment of tax.” As the IRS also expressly acknowledges, “[w]illfulness is not simply making a mistake.”

Challenging the government’s evidence of willfulness will be a key defense strategy in many cases. As a state of mind, willfulness can be difficult to prove—and targeted taxpayers can often use this to their advantage. With that said, federal prosecutors routinely pursue successful tax evasion charges in federal court, so an informed and strategic defense is required.

Importantly, while evidence of willfulness is required for the DOJ to pursue criminal tax evasion charges under Section 7201, it is not required for the imposition of civil penalties. As a result, when facing tax evasion allegations, high-income and high-net-worth taxpayers must be careful not to rely on their lack of willfulness exclusively. Additional defenses may be necessary to avoid (or mitigate) their civil liability to the IRS.

2. “Attempts”

Under Section 7201, federal prosecutors can pursue charges against any U.S. taxpayer who willfully “attempts” to evade or defeat their federal tax liability. This means that “successful” tax evasion is not required. Even if the IRS uncovers a tax evasion scheme before it results in an underpayment of tax liability (i.e., before the IRS issues a tax refund), the taxpayer can still face the maximum penalties allowed under the statute.

3. “In Any Manner”

Section 7201 allows for the prosecution of a U.S. taxpayer who willfully attempts to evade or defeat tax “in any manner.” This language makes clear that the statute covers any and all forms of attempted tax evasion. While the list of acts and omissions that can lead to prosecution for tax evasion under Section 7201 is extremely long, some of the most common allegations against high-income and high-net-worth taxpayers include:

  • Underreporting or underpaying federal tax liability
  • Improperly claiming credits, deductions and exemptions
  • Failing to disclose offshore accounts or other offshore assets
  • Making invalid claims regarding conservation easements and donations
  • Using other “abusive tax shelters” to evade tax liability

These are just examples. Federal tax evasion allegations under Section 7201 can take many other forms; and, when facing scrutiny from the IRS, it is critical that targeted taxpayers have a clear understanding of the specific allegations against which they need to defend themselves.

4. “To Evade or Defeat”

Section 7201 imposes criminal penalties for taxpayers who attempt “to evade or defeat tax.” “Evade” and “defeat” have similar meanings. The courts tend to reference attempts to “evade or defeat” tax as a singular offense, and the DOJ’s Criminal Tax Manual does not distinguish between these two terms. As a result, if a taxpayer is accused of willfully making any attempt to avoid paying any taxes owed, the taxpayer will typically be prosecuted for attempting “to evade or defeat” tax under Section 7201.

5. “Any Tax”

Finally, Section 7201 makes clear that individual and corporate taxpayers can face criminal prosecution for attempting to evade or defeat “any tax” imposed under federal law. This means that taxpayers can face tax evasion charges for underreporting or underpaying their liability for:

  • Ordinary income tax
  • Capital gains tax
  • Employment taxes
  • Estate and gift taxes
  • Excise taxes

With respect to ordinary income tax and capital gains tax, this applies to income from all sources—both in the U.S. and abroad. From salaries and bonuses to draws, dividends, realized gains from securities and cryptocurrency investments, and gambling winnings, if a U.S. taxpayer receives income, the taxpayer has an obligation to report it to the IRS.

Defending Against Tax Evasion Charges Under Section 7201

While Section 7201 is broad in scope, there are also several potential defenses to federal tax evasion charges. The defenses that a taxpayer will be able to assert in any particular case depend on the specific allegations and facts involved. For an overview of some potential defense strategies in federal tax evasion investigations under Section 7201, you can read: Defense Strategies for IRS CI Investigations Targeting Tax Evasion.

Request an Appointment with Texas Tax Evasion Attorney Lawrence Brown

If you need to know more about defending against federal tax evasion allegations as a high-income or high-net-worth taxpayer, we invite you to get in touch. To request an appointment with Texas tax evasion attorney Lawrence Brown, please call 888-870-0025 or tell us how you would like to be contacted online today.

Tax Evasion