Title 26, United States Code, Section 7203, makes it a crime to willfully fail to file a return, supply information, or pay tax, and provides as follows:
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year.”
Section 7203 makes illegal four entirely different acts of failure to timely complete a requirement of the IRS: (1) failure to pay an estimated tax or tax, (2) failure to make (file) a return, (3) failure to keep records, and (4) failure to supply information. Charges under § 7203 are rarely brought for failure to keep records and failure to supply information.
Failure to File
In order for the government to achieve a conviction in a failure to file a return case, it must prove the following beyond a reasonable doubt:
- an individual was a person required to file a return,
- an individual failed to file at the time required by law, and
- the failure was willful.
Required to File by Law
The first element the government must prove is that the individual charged is a person required to file a return. Section 7701(a)(1) defines “person” to “mean and include an individual, a trust, estate, partnership, association, company or corporation.”
Various requirements of the IRC (and related regulations) provide direction with regard to the obligation of a “person” to file a return. Section 6012 specifically lists individuals and entities obligated to file returns related to income. This section also covers the filing requirements for estates, trusts, political organizations, homeowners associations, recipients of advanced payments of the earned income credit, and bankruptcy estates. For our purposes here, § 6012(a)(1)(A) requires that anyone with gross income equal to or exceeding the exemption amount must file an income tax return.
The receipt of a threshold amount of gross income requires the filing of a tax return, and § 61(a) provides the following with regard to gross income:
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) compensation for services, including fees, commissions, fringe benefits, and similar items,
(2) gross income derived from business,
(3) gains derived from dealings in property,
(8) alimony and separate maintenance payments,
(10) income from life insurance and endowment contracts,
(12) income from discharge of indebtedness,
(13) distributive share of partnership gross income,
(14) income in respect of a decedent, and
(15) income from an interest in an estate or trust.
The government must prove an individual’s gross income was equal to or exceeded the statutory minimum, taking into consideration the individual’s marital status, filing status, and age (over or under 65). The government must prove an entity’s gross receipts exceeded the cost of goods sold by an amount required to meet the threshold.
Return Not Filed at Time Required by Law
The second element the government must prove, is that the return was not timely filed.
The mere filing of a tax document does not automatically meet the requirement of timely filing an income tax return. Individuals who purposely do not fill out the tax document with sufficient information to compute tax or who purposely do not include all sources of income (such as illegal income) may not meet the requirement of filing a tax return.
Examples of filling out tax documents without sufficient information to compute tax are:
- filling in the spaces with asterisks or words such as “object,”
- writing nothing in the spaces, and
- including only a liability figure, without information to support/prove that figure.
There is argument whether a tax document filed with all zeros in the spaces constitutes a tax “return.” The disagreement being on the one hand that zero is a number and can be utilized to compute tax, albeit inaccurate. On the other hand, it is argued that the zero return does not meet the requirement of sufficient information to calculate tax.
It should be noted, that while the courts are not in agreement on characterization of a zero return as a proper “return,” the zero return can be prosecuted under § 7203, § 7201, § 7206(1) or § 7206(2).
Section 7203 applies to individuals/entities that do not timely file the required tax return. The filing requirements can be found in Title 26, United States Code, under these sections:
- Individuals filing on a calendar year basis are required to file a return “on or before the 15th day of April following the close of the calendar year and returns made on the basis of a fiscal year shall be filed on or before the 15 th day of fourth month following the close of the fiscal year, except as otherwise provided in the following subsections of this section”. § 6072(a).
- Corporations are generally required to file “on or before the 15th of March following the close of the calendar year, and such returns made on the basis of a fiscal year shall be filed on or before the 15 th day of the third month following the close of the fiscal year…” § 6072(b).
- Filing dates for estate and gift tax returns are set forth under §§ 6075(a) and (b).
When the last day for filing a return falls on a Saturday, Sunday, or a legal holiday, the return is considered timely filed if it is filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday, as provided for in § 7503:
When the last day prescribed under authority of the internal revenue laws for performing any act falls on a Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday. For purposes of this section, the last day for the performance of any act shall be determined by including any authorized extension of time; the term “legal holiday” means a legal holiday in the District of Columbia; and in the case of any return, statement, or other document required to be filed, or any other act required under authority of the internal revenue laws to be performed, at any office of the Secretary or at any other office of the United States or any agency thereof, located outside the district of Columbia but within an internal revenue district, the term “legal holiday” also means a Statewide legal holiday in the State where such office is located.
For example, if a return is due on April 15th and April 15th falls on a Sunday, the return would be considered timely if it was filed on the following Monday, unless the Monday is a legal holiday, in which event, the return would be considered timely if it was filed on the next day-Tuesday.
If the return at issue was properly extended, the filing due date for timeliness purposes is the date to which the filing of the tax return was extended.
The government must prove, through trial testimony of an IRS service center representative, the non-existence of the record and must provide notice of their intent to do so at least 14 days before trial. This is specifically addressed under Federal Rule of Evidence, 803 (10):
(10) Absence of a Public Record . Testimony – or a certification under Rule 902 – that a diligent search failed to disclose a public record or statement if:
(A) the testimony or certification is admitted to prove that
(i) the record or statement does not exist; or
(ii) a matter did not occur or exist, if a public office regularly kept a record or statement for a matter of that kind; and
(B) in a criminal case, a prosecutor who intends to offer a certification provides written notice of that intent at least 14 days before trial, and the defendant does not object in writing within 7 days of receiving the notice – unless the court sets a different time for the notice or the objection (emphasis supplied).
In a failure to file case, the government must prove that the individual knew of his duty to file a tax return, and then voluntarily and intentionally violated that known legal duty. Negligence, even gross negligence, is not enough to prove willfulness. The government must prove that the individual intentionally violated his known duty to file. A showing of honest mistake or misunderstanding by the individual can be enough to negate the element of willfulness and result in acquittal.
The following are facts that usually help the government show willfulness:
- the individual is tax preparer/professional,
- failure to file tax returns for multiple years,
- education and knowledge of accounting,
- filing returns for years when a refund was due and not filing returns when tax was due,
- disregarding IRS warning notices, and
- receipt of a W-2 (proof that the individual was aware of the duty to file).
It is not a requirement that a tax deficiency exist to prove a charge of failure to file under § 7203, as long as the government proves the individual had sufficient gross income to file a return.
Failure to Pay
In order for the government to prove a case of failure to pay a tax under § 7203, three elements must exist beyond a reasonable doubt:
- an individual had a duty to pay a tax,
- an individual failed to pay the tax at the time required by law, and
- the failure was willful.
Required by Law to Pay a Tax
The payment of tax is required at the time the tax return is due. Therefore, it is not necessary for a return to be filed and/or tax to be assessed by the IRS. In most prosecutions involving failure to pay under § 7203, a tax return was filed and payment was either not made or not made in full at the time of the filing.
Failed to Pay
To prove the tax was not paid, the government can provide testimony from a qualified person and/or a certified document demonstrating the tax was not paid. Section 6151(a) provides that the tax must be paid when the return is due, without regard to any extension:
(a) General rule
Except as otherwise provided in this subchapter, when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return) . (Emphasis supplied).
(1) Income tax not computed by taxpayer
If the taxpayer elects under section 6014 not to show the tax on the return, the amount determined by the Secretary as payable shall be paid within 30 days after the mailing by the Secretary to the taxpayer of a notice stating such amount and making demand therefore.
(2) Use of government depositaries
For authority of the Secretary to require payments to Government depositaries, see section 6302 (c).
(c) Date fixed for payment of tax
In any case in which a tax is required to be paid on or before a certain date, or within a certain period, any reference in this title to the date fixed for payment of such tax shall be deemed a reference to the last day fixed for such payment (determined without regard to any extension of time for paying the tax.)
In a failure to pay case, the government has the burden of proving beyond a reasonable doubt that the individual knew of his obligation to pay tax, penalty, or interest and intentionally did not pay. Carelessness or negligence is not enough to support a failure to pay conviction. If the defense can convince the jury that the failure to pay was the result of an honest mistake or misunderstanding, an acquittal is the appropriate verdict.
Although it was once held willfulness could not be supported if it was proved that the individual did not have funds sufficient to pay the tax at the time the tax was due, later courts dismissed that holding. Specifically:
Every United States citizen has an obligation to pay his income tax when it comes due. A taxpayer is obligated to conduct his financial affairs in such a way that he has cash available to satisfy his tax obligations on time. As a general rule, financial ability to pay the tax when it comes due is not a prerequisite to criminal liability under § 7203. Otherwise, a recalcitrant taxpayer could simply dissipate his liquid assets at or near the time when his taxes come due and thereby evade criminal liability.
United States v. Tucker , 686 F.2d 230, 233 (5 th Cir 1982)
The venue, for purposes of failure to file under § 7203, will normally occur in the district where the return was required to be filed. The venue, for purposes of failure to pay under § 7203, will normally occur in the district in which the return was filed.
Statute of Limitations
The statute of limitations for a § 7203 failure to file/failure to pay prosecution is six years. However, the statute of limitations for prosecution under § 7203 for failure to supply information and failure to keep records is three years.
Generally, the statute of limitations begins on the date the return/payment is due, unless there is evidence to support willfulness occurring after that date. If so, the statute of limitations begins on the last date of the act of willfulness.