1.   

§7201 — Attempt to Evade or Defeat Assessment or Payment of Tax

Tax evasion, the most well-known of crimes under the Internal Revenue Code, is a felony defined in §7201 as the willful attempt to evade or defeat any tax imposed by Title 26.¹All section references are to the Internal Revenue Code of 1986, as amended, and the regulations thereunder, unless otherwise indicated. The basic elements of a prima facie case are: (1) the existence of a tax deficiency (an additional tax due and owing);²Boulware v. United States, 552 U.S. 421, 424 (2008); Sansone v. United States, 380 U.S. 343, 351 (1965); Lawn v. United States, 355 U.S. 339, 361 (1958). (2) an affirmative act constituting an evasion or attempted evasion of the tax;³Sansone v. United States, 380 U.S. 343, 351 (1965); Spies v. United States, 317 U.S. 492, 497–99 (1943). and (3) willfulness.⁴Cheek v. United States, 498 U.S. 192, 193 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 358–59 (1973); Sansone v. United States, 380 U.S. 343, 351 (1965); Holland v. United States, 348 U.S. 121, 124, 139 (1954).

Even if an affirmative act of fraudulent concealment is established, a defendant cannot be convicted of tax evasion unless an additional tax has either been assessed or is due.⁵Sansone v. United States, 380 U.S. 343, 351 (1965); United States v. Silkman, 220 F. 3d 935, 937 (8th Cir. 2000); United States v. Voorhies, 658 F. 2d 710, 715 (9th Cir. 1981).

Conviction under §7201 requires an affirmative act evidencing an intent to conceal so as to defeat the assessment or payment of a tax.⁶United States v. Hook, 781 F.2d 1166 (6th Cir. 1986), cert. denied, 479 U.S. 882 (1986); United States v. Kaatz, 705 F.2d 1237 (10th Cir. 1983); United States v. Hecht, 705 F.2d 976 (8th Cir. 1983). See Hesser v. United States, 40 F.4th 1221 (11th Cir. July 13, 2022) (absent evidence that move was aimed at evasion, transfer of house to trust after tax liability accrued but before tax lien filed did not constitute affirmative act); United States v. Litwok, 678 F.3d 208 (2d Cir. 2012) (citing United States v. Romano, 938 F.2d 1569, 1573 (2d Cir. 1991)) (absent other evidence of intent, failure to file return by itself did not constitute affirmative act); United States v. Miller, 588 F.3d 897 (5th Cir. 2009). An affirmative act “may be inferred from conduct such as keeping a double set of books, making false entries of alterations, or false invoices or documents, destruction of books or records . . . any conduct, the likely effect of which would be to mislead or to conceal.”⁷Spies v. United States, 317 U.S. 492, 499 (1943). “Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors.”⁸Spies v. United States, 317 U.S. 492, 499 (1943). See also United States v. Masat, 896 F.2d 88 (5th Cir. 1990). For example, filing a false return could be a felonious evasion under §7201, while failing to file a return is a misdemeanor under §7203.

Willfulness has been defined as the “voluntary, intentional violation of a known legal duty.”⁹United States v. Pomponio, 429 U.S. 10, 12 (1976), reh’g denied, 429 U.S. 987 (1976); United States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989). Previously, a showing of “evil motive, bad purpose, or corrupt design” was required for a conviction of a tax crime.¹⁰Wilson v. United States, 250 F.2d 312, 319 (9th Cir. 1957), reh’g denied, 254 F.2d 391 (9th Cir. 1958). See also United States v. Bishop, 412 U.S. 346 (1973). Courts now, however, authorize jury instructions that do not include such language.¹¹Cf. United States v. Kelly, 539 F.2d 1199, 1204 (9th Cir. 1976), cert. denied, 429 U.S. 963 (1976); United States v. Hawk, 497 F.2d 365 (9th Cir. 1974), cert. denied, 419 U.S. 838 (1974). See also the jury instructions for income tax evasion as developed by the Committee on Model Jury Instructions for the Ninth Circuit, as set forth in Manual of Model Criminal Jury Instructions for the Ninth Circuit. “Bad purpose” and “evil purpose” are not “magic words” that must be invoked in each criminal tax case.¹²United States v. Malinowski, 472 F.2d 850, 855 (3d Cir. 1973), cert. denied, 411 U.S. 970 (1973).

A good faith misunderstanding of the law is a defense to a tax crime,¹³United States v. Flitcraft, 803 F.2d 184, 186 (5th Cir. 1986); United States v. Kraeger, 711 F.2d 6 (2d Cir. 1983). See United States v. Alt, 996 F.2d 827 (6th Cir. 1993), cert. denied, 519 U.S. 872 (1996) (court’s instruction that jury had to presume defendants’ knowledge of their legal duty under tax laws relieves government of burden of proving willfulness and constitutes plain error requiring reversal). See also United States v. Sertich, 879 F.3d 558 (5th Cir. 2018) (evidence is sufficient for willful violation of §7202 where defendant avoided revenue agents and ignored accountants’ advice to pay over payroll taxes despite defendant’s claim that he believed unpaid taxes were loan from IRS). and the Supreme Court ruled in Cheek v. United States¹⁴498 U.S. 192 (1991), on remand, 931 F.2d 1206 (7th Cir. 1991). See United States v. Willis, 277 F.3d 1026, 1032 (8th Cir. 2002) (district court did not err in instructing jury as to whether defendant possessed good faith sufficient to negate a finding that his failure to file was willful; jury instruction clearly told jury to determine whether defendant’s belief was sincere and honest rather than whether it was reasonable); United States v. Montgomery, 747 F.3d 303 (5th Cir. 2014) (failure to instruct jury that defendant’s good faith belief did not have to be reasonable was harmless error in face of overwhelming evidence of intention to defraud). But see United States v. Hansen, No. 2:16-cr-00534-HCN, 2020 BL 234821 (D. Utah Jun. 24, 2020) (§7201 and §7212 give fair warning that defendant’s mailing of checks drawn on closed bank accounts to multiple IRS offices is subject to criminal penalties). that the defendant’s misunderstanding of the law need not be objectively reasonable. In Cheek, the defendant had appealed his convictions under §7201 and §7203. The Supreme Court granted certiorari to resolve a conflict among the circuits, a majority of which applied a standard of subjective reasonableness to a defendant’s belief in the lawfulness of his actions. Upon vacating the convictions and remanding the case, the Supreme Court explained that questions of knowledge and intent are characteristically for the fact finder. By requiring a defendant’s belief to be objectively reasonable before allowing it to be considered by the jury, the trial court had turned what was essentially a factual question into a legal issue and removed it from the fact finder’s consideration. The Supreme Court nevertheless rejected the defendant’s argument that a good faith belief that the tax laws are unconstitutional as applied to him could be raised as a defense. The Court explained that claims that some of the provisions of the tax code are unconstitutional are not the result of “innocent mistakes caused by the complexity of the [code]. Rather, they reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable.”¹⁵Cheek v. United States, 498 U.S. at 205. See also the Seventh Circuit’s comments on remand, 931 F.2d 1206, 1208–1209 (7th Cir. 1991).

Negligence, even gross negligence, is insufficient to establish willfulness.¹⁶United States v. Goichman, 407 F. Supp. 980, 986 (E.D. Pa. 1976), aff’d per curiam, 547 F.2d 778 (3d Cir. 1976). Thus, reckless disregard for the truth or negligent failure to inquire into the facts underlying criminal activity is insufficient to support a conviction.¹⁷United States v. Mapelli, 971 F.2d 284, 286 (9th Cir. 1992). See also United States v. Kelm, 827 F.2d 1319, 1324 (9th Cir. 1987). A “deliberate ignorance” jury instruction, sometimes called a “Jewell instruction,”¹⁸See United States v. Jewell, 532 F.2d 697 (9th Cir. 1976), en banc cert. denied, 426 U.S. 951 (1976). is only appropriate where the defendant purposefully contrives to avoid learning all the facts.¹⁹See United States v. Mapelli, 971 F.2d 284, 286 (9th Cir. 1992); United States v. Jewell, 532 F.2d 697 (9th Cir. 1976). In United States v. Mapelli,²⁰971 F.2d 284 (9th Cir. 1992). the Ninth Circuit held that a “deliberate ignorance” instruction incorrectly diluted the government’s duty to prove knowledge of a scheme to evade tax by skimming income where the instruction enabled the jury to convict if it found the taxpayer was ignorant of the scheme but “careless” in not finding out about it. The defendant’s conviction was reversed because the required criminal state of mind was not established. However, please note the Ninth Circuit’s en banc decision in Heredia holding that a deliberate ignorance instruction may be given in appropriate circumstances.²¹United States v. Heredia, 429 F.3d 830 (9th Cir. 2005).

A taxpayer who, after disclosing all relevant facts to counsel or an expert taxpayer, relies on, and acts upon, advice from the professional, in good faith, also has a defense to tax evasion.²²United States v. Kelley, 864 F.2d 569 (7th Cir. 1989); United States v. Meyer, 808 F.2d 1304 (8th Cir. 1987); Heller v. Plave, 743 F. Supp. 1553 (S.D. Fla. 1990). See United States v. Bishop, 291 F.3d 1100 (9th Cir. 2002) (subjective good faith standard of Cheek does not modify full disclosure requirement for successful good faith reliance on professional advice defense). In United States v. Kottwitz, 627 F.3d 1383 (11th Cir. 2010), the Eleventh Circuit held that where circumstantial evidence exists of reliance on an accountant, a jury instruction addressing reliance must be given.

Direct proof of willfulness is often unavailable. Circumstantial evidence of this element of the crime may consist of, inter alia, failure to report a substantial amount of income, a consistent pattern of underreporting large amounts of income, and the expenditure of large amounts of cash that cannot be reconciled with reported income.²³United States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989). Acknowledging that in a tax evasion case the burden to prove willfulness is steep, the D.C. Circuit Court in United States v. Han, 962 F.3d 568 (D.C. Cir. 2020), rejected the defendant’s claims that the introduction of evidence that the defendant used corporate funds to pay down debt for earlier personal expenses was an illegal introduction of prior bad acts, holding that such evidence was required to demonstrate beyond a reasonable doubt that the defendant acted willfully and “that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty.” Han, 962 F.3d at 572, citing Cheek v. United States, 498 U.S. 192, 201 (1991). An “affirmative willful attempt” can be inferred from “any conduct, the likely effect of which would be to mislead or to conceal” such as keeping false account books and records, destruction of records, concealment of assets or income, avoidance of usual transactional records, or other similar acts.²⁴Spies v. United States, 317 U.S. 492, 499 (1943). See, e.g., United States v. Thetford, 676 F.2d 170, 175 (5th Cir. 1982), cert. denied, 459 U.S. 1148 (1983); United States v. Beacon Brass Co., 344 U.S. 43, 44–46 (1952); United States v. Trownsell, 367 F.2d 815, 816 (7th Cir. 1966). The Internal Revenue Manual sets forth a list of potential “badges of fraud” that might be deemed to constitute a willful attempt.²⁵IRM 4.10.6.2.2 (5-14-99). “Badges of fraud” include: (1) understating income; (2) maintaining inadequate records; (3) failing to file tax returns; (4) offering implausible or inconsistent explanations of behavior; (5) concealing income or assets; (6) failing to cooperate with tax authorities; (7) engaging in illegal activities; (8) dealing in cash; (9) failing to make estimated tax payments; and (10) filing false documents, including filing false income tax returns.²⁶Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986); Parks v. Commissioner, 94 T.C. 654 (1990); Recklitis v. Commissioner, 91 T.C. 874 (1988); Lipsitz v. Commissioner, 220 F.2d 871 (4th Cir. 1955). See Schwartz v. Commissioner, T.C. Memo 2016-144 (taxpayer substantially understated his income, maintained inadequate records, throughout court proceedings offered implausible and inconsistent explanations for his understated income, acknowledged while under oath that he underreported gross receipts and income, and his §7206(1) conviction considered highly probative that he intended to evade tax).

Even if the government proves that the defendant has the requisite intent, the defendant can introduce evidence showing that the actions resulted in no tax deficiency. The Supreme Court addressed this issue in Boulware v. United States.²⁷552 U.S. 421 (2008). The Court ruled that where a taxpayer is charged with §7201 criminal tax evasion related to funds he diverted from a corporation for his own use, the taxpayer may claim as a defense that the funds were a non-taxable return of capital without then having to prove that the funds were intended as a return of capital when the diversion occurred. Mr. Boulware diverted funds from his closely held corporation and was charged with criminal tax evasion. To support his argument that the Government could not establish the tax deficiency required to convict him, Mr. Boulware sought to introduce evidence that his company had no earnings and profits in the relevant years. Thus, he argued the funds he received were non-taxable returns of capital under §301 and §316(a). The district court granted the Government’s in limine motion to bar evidence supporting Mr. Boulware’s return-of-capital theory and the Ninth Circuit affirmed. The Supreme Court vacated and remanded the Ninth Circuit’s decision and ordered that Mr. Boulware’s evidence be considered. The Court reasoned that because: (1) a tax deficiency is an essential element of tax evasion under §7201; and (2) there was no intent requirement in §301 and §316, Mr. Boulware should be able to introduce evidence that the payments were a non-taxable return of capital.²⁸On remand, the Ninth Circuit appears to have imposed a stringent standard for a taxpayer to meet in order to establish a Boulware defense. See United States v. Boulware, 558 F.3d 971 (9th Cir. 2009).

The government need not prove the exact amount of tax that it due and owing.²⁹United States v. Bishop, 264 F.3d 535, 550–52 (5th Cir. 2001); United States v. Thompson, 806 F.2d 1332, 1335–36 (7th Cir. 1986); United States v. Harrold, 796 F.2d 1275, 1278 (10th Cir. 1986); United States v. Citron, 783 F.2d 307, 314–15 (2d Cir. 1986); United States v. Buckner, 610 F.2d 570, 573–74 (9th Cir. 1979); United States v. Marcus, 401 F.2d 563, 565 (2d Cir. 1968). A few thousand dollars of omissions of taxable income may in a given case warrant criminal prosecution.³⁰United States v. Nunan, 236 F.2d 576, 585 (2d Cir. 1956); United States v. Davenport, 824 F.2d 1511, 1516–17 (7th Cir. 1987). The Seventh and Ninth Circuits have held that there is no substantiality requirement for a Section 7201 violation.³¹United States v. Daniels, 387 F.3d 636, 639 (7th Cir. 2004); United States v. Marashi, 913 F.2d 724, 735 (9th Cir. 1990).

Comment: While it is dangerous to draw any firm conclusions as to the amount of tax loss which will warrant a criminal tax prosecution, it is rare that a tax case with less than a $15,000 tax loss would be prosecuted. $15,000 is the amount of tax loss with respect to which the advisory federal sentencing guidelines would indicate, absent credit for acceptance of responsibility, a period of incarceration. Most tax cases prosecuted have tax losses in excess of $100,000 and many substantially more. The smaller the tax loss number the more difficult it may be for the government to prove willfulness beyond a reasonable doubt. On the other hand, as reflected in the well-publicized UBS related foreign bank account prosecutions, the tax loss can be much lower in certain types of cases that have become a priority to the IRS and the Department of Justice.

A defendant can be convicted under §7201 even though he is not the person legally responsible for the tax due. Thus, an officer of a corporation who signs a fraudulent return on behalf of the corporation can be indicted personally.³²United States v. Genser, 582 F.2d 292 (3d Cir. 1978), cert. denied, 444 U.S. 928 (1979); United States v. Ruffin, 575 F.2d 346 (2d Cir. 1978); United States v. Rosenthal, 470 F.2d 837 (2d Cir. 1972), cert. denied, 412 U.S. 909 (1973); United States v. Goldberg, 330 F.2d 30 (3d Cir. 1964), cert. denied, 377 U.S. 953 (1964); United States v. Fago, 319 F.2d 791 (2d Cir. 1963), cert. denied, 375 U.S. 906 (1963). Where the corporate officer fraudulently diverts corporate income to himself and then fails to report that income on his personal returns, he can also be charged with evasion of his own taxes.³³United States v. Genser, 582 F.2d 292 (3d Cir. 1978), cert. denied, 444 U.S. 928 (1979); United States v. Miller, (9th Cir. 1976), cert. denied, 430 U.S. 930 (1977); United States v. Burrell, 505 F.2d 904 (5th Cir. 1974); United States v. Rosenthal, 470 F.2d 837 (2d Cir. 1972), cert. denied, 412 U.S. 909 (1973); United States v. Goldberg, 330 F.2d 30 (3d Cir. 1964), cert. denied, 377 U.S. 953 (1964).

Individuals who are sole owners or principal stockholders of corporations sometimes attempt to evade both their own taxes and corporate taxes by altering corporate records or receipts. Such schemes might consist of an overstatement of purchases through the use of false invoices and checks, or improper claims of personal expenses on the books of the corporation. Thus, the diversion of corporate funds for individual use might result in charges of both corporate and personal tax evasion.³⁴See, e.g., United States v. Schenck, 126 F.2d 702 (2d Cir. 1942), cert. denied, 316 U.S. 705 (1942).

In light of the Supreme Court holding in James v. United States³⁵366 U.S. 213 (1961). that embezzled funds are taxable, taxpayers may no longer argue that diverted corporate income is nontaxable to the individual. With regard to the corporation’s taxes, the argument is occasionally made that the evasion charge cannot be sustained because there would be an offsetting “embezzlement” loss and, therefore, no tax deficiency. Under §165(e), embezzlement losses are deductible in the year of discovery. Thus, an officer-stockholder may contend that his own knowledge at the time of the taking of the corporate funds constitutes “discovery” for purposes of §165(e). This argument is unsound in two respects. First, the typical defendant usually has such ownership and control of the corporation that he cannot be held to “embezzle” from his own corporation. Second, as long as the defendant has signed the corporate returns “under the penalty of perjury,” the understatement of receipts or the overstatement of purchases would be false as to a material matter and, therefore, in violation of §7206(1).³⁶See United States v. Jernigan, 411 F.2d 471 (5th Cir. 1969), cert. denied, 396 U.S. 927 (1969); United States v. Rayor, 204 F. Supp. 486 (S.D. Cal. 1962), reh’g denied, 323 F.2d 519 (9th Cir. 1963), cert. denied, 375 U.S. 993 (1963).

When funds are diverted by a defendant-shareholder, the payment is usually treated as a “constructive” dividend to the shareholder. According to §316, a “dividend” is a distribution made by a corporation to its shareholders out of its accumulated earnings and profits, or out of its earnings and profits for the taxable year. Thus, proof in this type of criminal case would necessarily include an analysis of the corporate surplus as well as a computation of the “constructive” dividend out of this surplus.³⁷See United States v. Boulware, 552 U.S. 421 (2008). See also United States v. Bok, 156 F.3d 157 (2d Cir. 1998) (defendant accused of using corporate funds to pay personal expenses must establish some foundation in the record to justify a jury instruction on a return of capital theory). As the prosecution in constructive dividend cases will attempt to prove that sufficient corporate earnings were available, some defendants have argued that any fraud penalty imposed³⁸See §6663(a); Reg. §1.6664-1. should be deducted from corporate earnings, leaving the constructive dividends to be computed from whatever earned surplus remains. Although this argument has found support with respect to the assessment of tax deficiencies in civil cases,³⁹Drybough v. Commissioner, 238 F.2d 735 (6th Cir. 1956). it does not apply to criminal tax evasion cases.⁴⁰See Bernstein v. United States, 234 F.2d 475, at 482.

Comment: Many taxpayers believe that “living” out of the corporate pocketbook is simply not a criminal violation. The view adopted reflects an erroneous belief, i.e., the discovery of such irregularities will merely result in civil tax deficiencies plus penalties. United States v. Helmsley⁴¹941 F.2d 71 (2d Cir. 1991), cert. denied, 112 S. Ct. 1162 (1992). teaches us that this erroneous belief is not justified. There is a danger, however, that many taxpayers will not relate to the Helmsley case and its consequences because of the large amounts of money that were involved. In fact, criminal cases have been pursued for such diversions even when the amounts were much lower. There is no general rule that can be enunciated.

In tax prosecutions generally, venue is proper where the return is prepared,⁴²United States v. Gross, 276 F.2d 816 (2d Cir. 1960), cert. denied, 363 U.S. 831 (1960), aff’d per curiam, 286 F.2d 59 (2d Cir. 1961); United States v. Slutsky, 487 F.2d 832 (2d Cir. 1973). where the return is signed,⁴³United States v. King, 563 F.2d 559 (2d Cir. 1977), cert. denied, 435 U.S. 918 (1978). or where the return is filed.⁴⁴United States v. Albanese, 117 F. Supp. 736 (S.D.N.Y. 1954), aff’d, 224 F.2d 879 (2d Cir. 1955), cert. denied, 350 U.S. 845 (1955). In a prosecution brought under §7201, however, venue also may lie in any judicial district where an attempt to evade took place.⁴⁵See, e.g., United States v. Goodyear, 649 F.2d 226 (4th Cir. 1981); United States v. Albanese, 117 F. Supp. 736 (S.D.N.Y. 1954), aff’d, 224 F.2d 879 (2d Cir. 1955), cert. denied, 350 U.S. 845 (1955); Beaty v. United States, 213 F.2d 712 (4th Cir. 1954), vac’d and rem’d, 348 U.S. 905 (1955), reaff’d, 220 F.2d 682 (4th Cir. 1955), cert. denied, 349 U.S. 946 (1955); United States v. DeFabritus, 605 F. Supp. 1538 (S.D.N.Y. 1985).

Under the Code, upon conviction of tax evasion the defendant may be fined, or imprisoned not more than five years, or both, and made to pay the costs of prosecution and any special assessments. Under 18 U.S.C. §3571, the maximum fine is the greater of $250,000 for individuals and $500,000 for corporations; or twice the gross gain to the defendant or gross loss to another caused by the offense.

The statute of limitations for the offense of willfully attempting to evade or defeat any tax is six years.⁴⁶§6531(2). The statute begins to run from the date of the last affirmative act that took place or the due date of the return, whichever is later. Additionally, the statute of limitations may be tolled when the taxpayer is outside of the United States⁴⁷§6531. or can be suspended in certain types of summons enforcement proceedings.⁴⁸§7609(e)(1).

2.   

§7202 — Willful Failure to Collect or Pay Over Tax

Section 7202 proscribes the willful failure to collect or pay over tax. There are two offenses described within this statute: (1) the willful failure to collect taxes; and (2) the willful failure to truthfully account for and pay over taxes.

The basic elements of a prima facie case are: (1) the duty to collect and/or truthfully account for and pay over taxes; (2) the failure to collect or truthfully account for and pay over taxes; and (3) willfulness. For purposes of §7202, willfulness merely requires knowledge and violation of a duty, i.e., it does not require knowledge that one is committing a criminal act.⁴⁹United States v. Gilmore, 837 Fed. Appx. 101 (3d Cir. 2020) (jury instruction that willfulness could not be found if defendant believed in good faith that the tax laws did not make his conduct unlawful was proper; belief by defendant that conduct had to be criminal is not required).

This section provides penalties to ensure that employers comply with their obligation to withhold federal wage and FICA taxes and other withholding taxes and pay over to the government the sums withheld.⁵⁰Slodov v. United States, 436 U.S. 238 (1978). See United States v. Hamdan, No. 19-60-WBV-KWR, 2020 BL 192192 (E.D. La. May 22, 2020) (government is not required to offset under §6402, therefore that defendant overpaid personal income taxes by substantial amount is not defense to failure to collect, account for and pay employment taxes; fact that defendant did not include cash payments made to business managers and to undocumented workers in information provided to accountants for preparation of business returns supports government argument for willfulness). Note that §7202 is broader than just applying to employment withholding taxes. It applies to all withholding taxes, e.g., airport and airway use tax. In order to sustain a conviction under this section, both the failure to truthfully account for and the failure to pay over must be willful.⁵¹United States v. Poll, 521 F.2d 329 (9th Cir. 1975), cert. denied, 429 U.S. 977 (1976), reh’g denied, 429 U.S. 1079 (1976).

The plain language of the statute creates a dual obligation — to truthfully account for and pay over trust fund taxes — that is satisfied only by fulfilling both separate requirements.⁵²United States v. Evangelista, 122 F.3d 112, 121 (2d Cir. 1997), cert. denied, 522 U.S. 1114 (1998). Accordingly, §7202 is violated by one who willfully fails either to account for or to pay over the necessary funds.⁵³See, e.g., United States v. Sertich, 879 F.3d 558 (5th Cir. 2018) (violations to either withhold or to pay over tax are to be read disjunctively); United States v. Gilbert, 266 F.3d 1180 (9th Cir. 2001) (violation to either withhold or to pay over tax subjects taxpayer to prosecution); United States v. Evangelista, 122 F.3d 112 (2d Cir. 1997) (same), cert. denied, 522 U.S. 1114 (1998).

Comment: For many years, it was believed that to establish willfulness under §7202, the government had to establish beyond a reasonable doubt that at the time the payment was due the taxpayer possessed sufficient funds to enable him to meet his obligation or that the lack of sufficient funds was the result of a voluntary act.⁵⁴United States v. Sertich, 879 F.3d 558 (5th Cir. 2018); United States v. Gilbert, 266 F.3d 1180 (9th Cir. 2001); United States v. Evangelista, 122 F.3d 112 (2d Cir. 1997), cert. denied, 522 U.S. 1114 (1998). This in part accounted for the limited use of §7202 in tax prosecutions. However in a more recent decision, United States v. Easterday,⁵⁵564 F.3d 1004 (9th Cir. 2009). a divided panel of the Ninth Circuit concluded that Poll was irreconcilable with the Supreme Court’s ruling in United States v. Pomponio,⁵⁶429 U.S. 10 (1976). and held that evidence of inability to pay and financial distress of the defendant was properly excluded from evidence by the trial court.

Under the Code, upon conviction, a defendant may be fined, or imprisoned not more than five years, or both, and made to pay the costs of prosecution. The maximum fine is $250,000 for individuals and $500,000 for corporations.⁵⁷See 18 U.S.C. §3571. The fine may be greater than the above if: (1) a defendant derives pecuniary gain from the offense, the defendant may be fined not more than twice the gain or (2) the defendant’s acts result in a pecuniary loss to another, the defendant may be fined up to twice the third party’s loss.⁵⁸See 18 U.S.C. §3571(d).

The statute of limitations for violation of this code section is six years.⁵⁹§6531(4).

3.   

§7203 — Willful Failure to File Return, Supply Information or Pay Tax

Pursuant to §7203, it is a misdemeanor to willfully fail to pay any tax or estimated tax, make a return, keep any records, or supply any information required to be supplied under the Code. In contrast to §7201, which requires an affirmative act of evasion, §7203 is based on an omission of a statutory duty to make a return.⁶⁰United States v. Ming, 466 F.2d 1000 (7th Cir. 1972), cert. denied, 409 U.S. 915 (1972), reh’g denied, 409 U.S. 1051 (1972). As such, a violation of §7203 generally is a lesser included offense of the felony of attempting to evade or defeat taxes.⁶¹United States v. DeTar, 832 F.2d 1110 (9th Cir. 1987); United States v. Cook, 505 F.2d 659 (5th Cir. 1974), cert. denied, 421 U.S. 1000 (1975). See also Sansone v. United States, 380 U.S. 343 (1965); Spies v. United States, 317 U.S. 492 (1943). In a memorandum dated February 12, 1993, the U.S. Department of Justice, Tax Division stated its position that neither party in a §7201 case is entitled to an instruction that willful failure to file (§7203) is a lesser included offense of which the taxpayer may be convicted. As such, the government maintains that cumulative punishments could be imposed for a course of conduct that violated both §7201 and §7203.

The elements of an offense under §7203 are: (1) willfulness, and (2) the omission of at least one of the four required acts enumerated in the statute.⁶²Sansone v. United States, 380 U.S. 343, 351 (1965). As noted earlier, a good faith misunderstanding of the law may negate willfulness, and the misunderstanding need not be objectively reasonable.⁶³United States v. Edgington, 727 F. Supp. 1083 (E.D. Tex. 1989). See “willfulness” discussions at I.A.1., above, and at I.A.4., below. Although the same standard of willfulness is applied to all Internal Revenue offenses,⁶⁴United States v. Bishop, 412 U.S. 346 (1973). §7203 specifically requires that the defendant deliberately and intentionally fail to file a return with knowledge that he was required by law to do so.⁶⁵United States v. Kock, 66 F.4th 695 (8th Cir. 2023) (on appeal, defendant’s convictions for failure to file tax returns under §7203 affirmed; judgment rem’d for determination of taxable costs upon government’s cross-appeal for district court’s failure to award costs); United States v. Greenlee, 380 F. Supp. 652 (E.D. Pa. 1974), aff’d, 517 F.2d 899 (3d Cir. 1975), cert. denied, 423 U.S. 985 (1975); United States v. Rosenfield, 469 F.2d. 598 (3d Cir. 1972), cert. denied, 411 U.S. 932 (1972); United States v. Klein, 438 F. Supp. 485 (S.D.N.Y. 1977). See United States v. Waller, 829 Fed. Appx. 235 (9th Cir. 2020) (where defendant relied on internal IRS records obtained through FOIA request that included computerized code indicating defendant was not required to file return, his defense under entrapment by estoppel theory fails because information was too vague to qualify as affirmative statement by authorized government official); United States v. Gaumer, 972 F.2d 723 (6th Cir. 1992) (where jury might have discerned nexus between defendant’s exhibits and his belief that he was not required to file returns, court erred in not allowing defendant to present relevant evidence). As the willfulness element requires proof of an “intentional violation of a known legal duty,”⁶⁶United States v. Pomponio, 429 U.S. 10, 12 (1976). §7203 is a specific intent crime.⁶⁷United States v. Birkenstock, 823 F.2d 1026 (7th Cir. 1987). But see United States v. Gruttadauro, 818 F.2d 1323, 1328 (7th Cir. 1987) (finding that the element of willfulness contained in 29 U.S.C. §186 [ERISA] requires only general intent).

While §7203 is most often applied to the case of a taxpayer who willfully fails to file a tax return, the statute is multifaceted. Given the Code’s extensive record-keeping requirements,⁶⁸See §6001. the provision has a potential for broad application. Further, the Department of Justice and the IRS remain alert to the possibility of upgrading a willful-failure-to-file case to a tax evasion case under §7201. To fulfill the elements of a §7201 offense, evidence of an “affirmative act” must be adduced, e.g., concealment of assets, transactions in the names of aliases, irregular currency transactions, and the like. Also, a prior, concomitant or subsequent false statement may elevate the §7203 misdemeanor to a felony under §7201.⁶⁹United States v. Copeland, 786 F.2d 768 (7th Cir. 1985).

For purposes of §7203, a document is a return if it contains all of the information required by the Code or the Regulations.⁷⁰United States v. Grabinski, 727 F.2d 681 (8th Cir. 1984). See also United States v. Long, 618 F.2d 74 (9th Cir. 1980) (return on which zeroes had been inserted in spaces reserved for entering exemptions, income, tax, and tax withheld, was found to be return, thus, prosecution for willful failure to file was improper). Cf. Muir v. Commissioner, T.C. Memo 1981-171 (return that did not state amount of income and that claimed Fifth Amendment privilege against self-incrimination was not return). A “valid exercise of the [fifth amendment] privilege” against self-incrimination can be a defense to a failure to supply a particular item or items on a tax return,⁷¹Garner v. United States, 424 U.S. 648, 662 (1976). but this constitutional privilege will not excuse a willful failure to actually file a return,⁷²See United States v. Sullivan, 274 U.S. 259, 263–64 (1927); United States v. Edgington, 727 F. Supp. 1083 (E.D. Tex. 1989). or a filing of a document so incomplete that it cannot be characterized as a return.⁷³United States v. Heise, 709 F.2d 449, 451 (6th Cir. 1983). See cases cited therein for the rule that a document such as a “fifth amendment return,” containing no information from which the tax liability may be determined, is not a “return.” But see United States v. Kimball, 896 F.2d 1218 (9th Cir. 1990), where taxpayer’s 1040 Forms, which contained only asterisks denoting his constitutional objections to disclosure of information, were considered returns.

For prosecutions brought under this section, venue is proper in any judicial district where the “duty” could have been performed.⁷⁴Travis v. United States, 364 U.S. 631 (1961); United States v. Rice, 659 F.2d 524 (5th Cir. 1981). Section 6091 provides that, in general, returns or other documents must be filed (“the duty” is to be performed) in the Internal Revenue District where the taxpayer’s legal residence or principal place of business is located or where the Service Center serving one of those Internal Revenue Districts is located. Under §7203, upon conviction of this misdemeanor the defendant may be fined, or imprisoned not more than one year, or both, and made to pay the costs of prosecution. Under the Criminal Fine Improvement Act of 1987, the maximum fine is $100,000 for individuals and $200,000 for corporations, except that for felony offenses committed after November 29, 1990, the maximum fine is $250,000 for individuals and $500,000 for corporations.⁷⁵Pub. L. No. 100-185, amending maximum fines (taking effect when Pub. L. No. 98-473, Title II, Chap. 2, Sentencing Reform Act, took effect).

While §7203 generally is considered a misdemeanor statute, in 1988, it was amended by providing that a willful violation of any provision of §6050I is a felony⁷⁶§7203; H.R. Rep. No. 681(I), 101st Cong., 2d Sess. 1 (1990). and the maximum length of imprisonment may be five years rather than one year.⁷⁷§7203. Enhancing the punishment for the failure to file information returns under §6050I was one of a number of measures enacted to inhibit the use of cash generated by illegal activities (principally drug trafficking), although §6050I applies to legal source income as well. Section 6050I is discussed further at I.C., below.

4.   

§7206(a)(1), §7206(a)(2) — Subscribing to False Returns; Aiding and Abetting in Preparation of False Returns

Section 7206, a felony provision, is violated by, inter alia, any person who willfully makes any document under the Internal Revenue laws that she or he does not believe to be true and correct and any person who willfully aids or assists in the preparation of any document under the Internal Revenue laws that is fraudulent or false.⁷⁸See the Worksheets, below, for an example of an indictment charging violations of §7206(1) and for an example of an Information charging a violation of §7206(2). See also United States v. Borman, 992 F.2d 124 (7th Cir. 1993) (taxpayers’ use of former Form 1040A to report wage income while remaining silent about business income they received during year did not render them criminally liable for filing false return; government should have sought indictment for tax evasion under §7201); United States v. Young, 832 Fed. Appx. 748 (2d Cir. 2020) (defendant had requisite mens rea where he filed returns with amounts of income and withholding he had never earned, taking care to not attract attention and ignoring advice from government officials that his course of action was fraudulent and could result in liability). See IRM 25.24.4 (10-7-2020), in which the IRS provides guidance on collection activity when a taxpayer alleges return preparer fraud or misconduct. It is the most frequently charged criminal tax violation. In a prosecution brought under §7206, venue lies in any district where the return was signed, filed,⁷⁹United States v. Marrinson, 832 F.2d 1465 (7th Cir. 1987); United States v. King, 563 F.2d 559 (2d Cir. 1977). or the acts of aiding and assisting took place.⁸⁰United States v. Newton, 68 F. Supp. 952 (W.D. Va. 1946), aff’d, 162 F.2d 795 (4th Cir. 1947).

Upon conviction the defendant may be fined, or imprisoned not more than three years, or both, and made to pay the costs of prosecution.⁸¹§7206 (flush language). Note that 18 U.S.C. §3571 provides for greater fines than the Code. See I.A.1., above. For example, see IRM 5.1.29 (1-9-15) relating to petitions for the remission forfeiture process, applicable for recovering fraudulent refund amounts that have been seized and subsequently forfeited using Title 18 seizure/forfeiture authority. Under the Criminal Fine Enforcement Act of 1984,⁸²18 U.S.C. §3571. the maximum fine is $250,000 for individuals and $500,000 for corporations. However, if a defendant derives pecuniary gain from the offense, the fine may be up to twice the gain; if the defendant’s acts result in a pecuniary loss to another, the fine may be up to twice the third party’s loss.⁸³18 U.S.C. §3571(d).

Note: A §7206(1) or §7206(2) conviction where the government’s revenue loss exceeds $10,000 (or the loss to the victim exceeds $10,000) qualifies as an aggravated felony under 8 U.S.C. §1101(a)(43)(M)(i), and such individual can be deported pursuant to 18 U.S.C. §1227(a)(2)(A).⁸⁴See Kawashima v. Holder, 565 U.S. 478 (2012), reh’g denied, 566 U.S. 958 (2012). Furthermore, the U.S.S.G. §3A1.1(b)(1) vulnerable victim enhancement can apply to a §7206(2) conviction, which means that if the defendant knew or should have known that a victim was a vulnerable victim, the sentence is increased by two levels. The victim need not suffer actual harm, whether financial or otherwise, for enhancement to apply.⁸⁵United States v. Adeolu, 836 F.3d 330 (3d Cir. 2016) (conviction for §7206(2) aiding and abetting preparation of materially false tax returns generally invokes imprisonment of not more than three years, however, because of enhancement taxpayer sentenced to 56 months).

The requisite elements of an offense under §7206(1) are: (1) a belief that the return, statement or other document is not true and correct; (2) willfulness; (3) materiality; and (4) the making and subscribing, under penalty of perjury, of the document in question which is then filed with the IRS.⁸⁶See United States v. Marabelles, 724 F.2d 1374 (9th Cir. 1984); United States v. Engle, 458 F.2d 1017 (8th Cir. 1972). In United States v. Ingredient Tech. Corp., 698 F.2d 88 (2d Cir. 1983), the defendant corporation argued that its conviction under §7206(1) should be reversed on the ground that a corporation cannot commit perjury because it cannot take an oath to tell the truth. The argument was rejected. The court stated that “while a corporation has no independent state of mind, the acts of individuals on its behalf may be properly chargeable to it.” The perjury is deemed to occur when the false entry is made, even if it is never relied upon.⁸⁷United States v. Romanow, 509 F.2d 26, 28 (1st Cir. 1975); United States v. DiVarco, 343 F. Supp. 101 (N.D. Ill. 1972), aff’d, 484 F.2d 670 (7th Cir. 1973). See United States v. Fisher, No. 20-CR-0044-CVE-CDL, 2020 BL 488414 (N.D. Okla. Dec. 16, 2020) (offense is committed upon filing of return; defendant’s claim of coercion by government is denied where government’s investigation actions occurred six months after false return was filed). As §7206(1) proscribes the making and subscribing of a return, only the taxpayer himself may be prosecuted under this provision.

According to the court in United States v. Balistrieri,⁸⁸346 F. Supp. 341 (E.D. Wis. 1972). “the essence of the offense under §7206(1) is the lack of belief in the truth and correctness of the matter represented. . . . An inaccurate statement, in and of itself, is not a violation of §7206(1).” Thus, there must exist sufficient proof that the taxpayer did not believe that the statements contained in his return were true and that the untrue statements were made willfully.⁸⁹See United States v. Scarberry, 208 F.3d 228 (10th Cir. 2000) (jury could reasonably infer that defendant who filed joint income tax returns with two different men for same tax year acted willfully); United States v. Jernigan, 411 F.2d 471 (5th Cir. 1969); Escobar v. United States, 388 F.2d 661 (5th Cir. 1967); Gaunt v. United States, 184 F.2d 284 (1st Cir. 1950). The Sixth Circuit has held that the taxpayer did not believe the return to be true and correct by failing to report his business income.⁹⁰United States v. Williams, 683 F. App’x 376 (6th Cir. 2017). The court held that the taxpayer did not believe the return to be true and correct by failing to report his business income. The taxpayer claimed that former Form 1040EZ does not ask for business income, and thus, he had no obligation to report it. He based his argument on the Seventh Circuit reasoning in United States v. Borman,⁹¹992 F.2d 124 (7th Cir. 1993). which determined that the untruth must be found in a statement of some material information on the form itself, and any implication drawn from the filing of a form — that the taxpayer had received no income requiring the use of a different form- is not enough. The Sixth Circuit rejected Borman on two grounds: (1) it has no precedential value; and (2) former Form 1040EZ has changed since Borman because filers must now swear under the penalties of perjury that all amounts and sources of income received during the tax year have been listed.

Note: Reliance on the advice of a professional preparer may serve as a defense under §7206(1) if the defendant provided full information to the preparer and then filed the return without having reason to believe it was false.⁹²United States v. Wilson, 887 F.2d 69, 73 (5th Cir. 1989).

In United States v. Robinson,⁹³811 F. Supp. 1174 (S.D. Miss. 1993). the court dismissed an indictment charging the taxpayer with violating §7206(1) for claiming deductions for retirement plan contributions that were never made, because the IRS failed to establish that the taxpayer’s failure was willful at the time the returns were filed. The court explained that taxpayers are permitted to claim deductions for contributions to retirement plans not yet made so long as the contributions are made by the due date of the return. The court dismissed the indictment because the IRS failed to prove that when the taxpayer claimed the deductions, he had no intention of making the contributions.

The element of “willfulness” in §7201 (felony), §7202 (felony), §7203 (misdemeanor), §7206 (felony) and §7207 (misdemeanor) has the same meaning.⁹⁴United States v. Bishop, 412 U.S. 346, 359–61 (1973). See also United States v. Pomponio, 429 U.S. 10, 12 (1976). More than a showing of careless disregard for the truth is required.⁹⁵United States v. Dahlstrom, 713 F.2d 1423, 1427 (9th Cir. 1983); United States v. Dyer, 922 F.2d 105, 108 (2d Cir. 1990) (filing of amended return is not admission of fraud; instead, elements of willfulness under §7206(1) are met when taxpayer files amended return if he believed that original return was untrue at time of its filing). See United States v. Eilertson, 707 F.2d 108 (4th Cir. 1983), in which a §7203 conviction was reversed because the jury charge and the prosecutor’s summation failed to adequately distinguish “willfulness” from “careless disregard.” See also United States v. Chmielewski, 218 F.3d 840 (8th Cir. 2000) (unfiled tax returns, including returns for years not at issue, that show higher taxable income than ultimately reported may be admitted into evidence to show willfulness in §7206(1) offense). As noted earlier, in Cheek v. United States,⁹⁶498 U.S. 192 (1991). See United States v. Kokenis, 662 F.3d 919, 922 (7th Cir. 2011) (although district court applied erroneous standard that defendant must waive Fifth Amendment rights and testify in determining whether defendant could argue good faith in false income tax return criminal case, error was harmless given overwhelming evidence of lack of good faith). the Supreme Court ruled that the taxpayer’s good-faith belief that he either has no income or is not required to file a return does not have to be objectively reasonable in order to negate the willfulness element of §7201 and §7203. The Court explained that questions of knowledge and intent are characteristically for the fact finder; thus, the Court concluded that when the trial court charged the jury that the taxpayer’s belief had to be objectively reasonable before they could consider it, the trial court wrongly turned what is a factual question into a legal issue and removed it from the fact finder’s consideration.⁹⁷See also United States v. Wanland, 830 F.3d 947 (9th Cir. 2016) (delinquent taxpayer argued that concealed partnership draws were not “salary or wages” reachable by continuous levies, so concealment of those funds was not tax evasion by concealment of property subject to levy, but district court properly left that as factual dispute resolved by jury, which returned guilty verdicts on tax evasion counts). See where collateral estoppel also failed in the later proceeding, United States v. Wanland, No. 2:13-cv-02343-KJM-KJN, 2020 BL 319618 (E.D. Cal. Aug. 21, 2020).

Another disputed element among the courts is the type of form required under §7206(1). In Holroyd v. United States,⁹⁸732 F.2d 1122 (2d Cir. 1984). the Second Circuit concluded that a person may be convicted of a §7206(1) violation if the individual makes, subscribes, and verifies any return, statement or other document in response to any inquiry by the IRS falling within the scope of its jurisdiction, regardless of whether the statement is on a form expressly authorized by statute or regulation. The Fifth Circuit, however, held that the form must be one authorized by statute or regulation.⁹⁹United States v. Levy, 533 F.2d 969 (5th Cir. 1976). See United States v. Pirro, 212 F.3d 86 (2d Cir. 2000) (failure to report ownership interest of individual who is not shareholder on income tax return of S corporation is not basis for criminal charge under §7206; Code, regulations and tax form only refer to shareholder not any other ownership interest).

For purposes of §7206(1), the materiality element is defined as all information necessary for the IRS to determine the accuracy of the tax return in question.¹⁰⁰United States v. Scarberry, 208 F.3d 228 (10th Cir. 2000) (materiality found where defendant filed joint returns with two different men for same tax year); United States v. Rayor, 204 F. Supp. 486, 490–492 (S.D. Cal. 1962), reh’g denied, 323 F.2d 519 (9th Cir. 1963). There are, however, certain items, such as the source of income, which are considered material as a matter of law.¹⁰¹United States v. DiVarco, 343 F. Supp. 101 (N.D. Ill. 1972), aff’d, 484 F.2d 670 (7th Cir. 1973). Under the Supreme Court’s decision in Gaudin, 515 U.S. 506 (1995), the issue would nevertheless have to be submitted to the jury with an appropriate instruction. In addition, a finding of materiality is not dependent upon whether the false statement results in a deficiency;¹⁰²United States v. Peters, 153 F.3d 445, 461 (7th Cir. 1998) (proof of tax deficiency not essential to proving materiality); United States v. Marashi, 913 F.2d 724 (9th Cir. 1990); United States v. Rayor, 204 F. Supp. 486 (S.D. Cal. 1962), reh’g denied, 323 F.2d 519 (9th Cir. 1963). See also United States v. Jacobson, 547 F.2d 21 (2d Cir. 1976). the existence of a tax deficiency is not an element of this crime.¹⁰³United States v. Marabelles, 724 F.2d 1374, 1380 (9th Cir. 1984); United States v. Miller, 491 F.2d 638, 646 (5th Cir. 1974), reh’g denied en banc, 493 F.2d 664 (5th Cir. 1974). An understatement of gross receipts, even if fully offset by an understatement of losses, can support criminal liability,¹⁰⁴United States v. Olgin, 745 F.2d 263 (3d Cir. 1984); United States v. Greenberg, 735 F.2d 29 (2d Cir. 1984) (§7206(1) conviction upheld on $48.00 deficiency); United States v. Taylor, 574 F.2d 232, 234 (5th Cir. 1978). and the government is not required to prove that the amount by which unreported income exceeded reported income was substantial.¹⁰⁵United States v. Holland, 880 F.2d 1091 (9th Cir. 1989).

Additionally, in United States v. Gaudin,¹⁰⁶515 U.S. 506 (1995). the Supreme Court ruled that the Fifth and Sixth Amendments to the Constitution require that the issue of materiality in 18 U.S.C. §1001 (the federal perjury statute) be submitted to a jury. Regardless that the decision in Gaudin involved 18 U.S.C. §1001, the same reasoning would hold true for false tax return cases charged under §7206(1).¹⁰⁷See United States v. Scholl, 166 F.3d 964, 980 (9th Cir. 1999); United States v. Uchimura, 125 F.3d 1282, 1286 (9th Cir. 1997); United States v. McGuire, 99 F.3d 671, 672 (5th Cir. 1996). Nevertheless, the harmless error rule applies if the trial court refused to submit the materiality issue to the jury for a tax fraud charge under §7206(1).¹⁰⁸United States v. Neder, 527 U.S. 1 (1999), aff’g in part and rev’g in part, 136 F.3d 1459 (11th Cir. 1998); United States v. Foster, 229 F.3d 1196 (5th Cir. 2000). Furthermore, although the government has to prove to the jury the materiality of a defendant’s false statements, it does not have to prove the defendant’s knowledge of the materiality.¹⁰⁹United States v. Boulerice, 325 F.3d 75 (1st Cir. 2003).

On some returns (e.g., corporate Form 1120 and partnership Form 1065) the material falsehood may be found on the balance sheet. Hence, although a tax deficiency is not involved, a crime may have been committed. Also, a violation may occur if taxpayer X overreports income by reporting income of taxpayer Y. “The accuracy of items of taxable income reported on the return of one individual or entity may affect the ability of the IRS to assess the tax liability of another taxpayer. Furthermore, overstated income may shield from scrutiny falsely inflated deductions.”¹¹⁰United States v. Goldman, 439 F. Supp. 337, 344 (S.D.N.Y. 1977). “The conclusion that an overstatement of income may result in a prosecution is buttressed by the congressional determination to make §7206(1) a crime separate and apart from income tax evasion, §7201.” 439 F. Supp. at 344. See also United States v. DiVarco, 343 F. Supp. 101 (N.D. Ill. 1972). Cf. Rutkin v. United States, 343 U.S. 130, 147 (1952), where the prosecution conceded, “that although, on a strict construction of the Internal Revenue Code, it may be that the proceeds of [certain] sales should have been reported by the beneficial rather than by the record owners, their failure to so report the proceeds does not provide a satisfactory basis for a charge against them of a willful attempt to evade and defeat the tax . . .”

Note: “Filing” is a requisite under §7206(1) and must be proved beyond a reasonable doubt.¹¹¹United States v. Boitano, 796 F.3d 1160 (9th Cir. 2015); United States v. Hanson, 2 F.3d 942 (9th Cir. 1993). However, there is no bright line rule for what is considered “filed” for purposes of a §7206(1) conviction. In a Ninth Circuit case, United States v. Hanson,¹¹²2 F.3d 942 (9th Cir. 1993). the taxpayer argued that his returns were not “filed” because the IRS never fully processed them. The court rejected that and instead held that the returns were considered “filed” when the taxpayer personally mailed the forms and the IRS received them. Specifically, the court stated that a return is “filed” at the time it is delivered to the IRS.

In United States v. Boitano,¹¹³796 F.3d 1160 (9th Cir. 2015). the court was bound by its circuit’s decision in Hanson that “filing” is a §7206(1) element, unless the Supreme Court held otherwise, which it had not. Both parties agreed that §6091(b)(4) and Reg. §1.6091-2 deemed returns filed, only if electronically filed, mailed to an appropriate IRS service center, or hand-delivered to an authorized agent to receive them. When the taxpayer handed his returns to the IRS’s Special Enforcement Program agent, the government conceded that such act was not considered “filed” under the IRS definition, resulting in a reversal of the taxpayer’s felony §7206(1) convictions.

Observation: The Boitano decision emphasized the government’s “no filing” concession throughout its opinion, which seemed to be the ultimate reason that the required element was missing. Thus, the Ninth Circuit did not opine on whether an IRS Special Enforcement Program agent was authorized to receive hand-delivered tax returns for purposes of the §7206(1) filing requisite.

The necessary elements of §7206(2), which generally is used to prosecute return preparers,¹¹⁴United States v. Morrison, 833 F.3d 491 (5th Cir. 2016) (citing United States v. Baker, 522 F. App’x 244 (5th Cir. 2013); United States v. Mudekunye, 646 F.3d 281 (5th Cir. 2011); United States v. Statin, 367 F. App’x 492 (5th Cir. 2010)). are: (1) the defendant aided or assisted in the preparation of a return; (2) the return was fraudulent or false as to a material matter; and (3) the defendant’s act was willful.¹¹⁵United States v. Morrison, 833 F.3d 491 (5th Cir. 2016) (referencing United States v. Clark, 577 F.3d 273 (5th Cir. 2009)); United States v. Salerno, 902 F.2d 1429, 1432 (9th Cir. 1990); United States v. Dahlstrom, 713 F.2d 1423, 1426–27 (9th Cir. 1983). Willfulness requires that the defendant have the specific intent to defraud the government in its enforcement of the tax laws.¹¹⁶United States v. Salerno, 902 F.2d 1429 (9th Cir. 1990) (in embezzling money, casino employees lacked specific intent to defraud government in its enforcement of tax laws when they caused their employer to file false return; therefore, under statute, they did not act willfully); United States v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983). See United States v. Parris, 243 F.3d 286 (6th Cir. 2001) (willfulness found where defendant who, as purported accountant, devised plan for clients involving use of S corporation and partnership that would own client’s residence and claim personal living expenses as business deductions). A false statement is material when it has the potential for hindering the IRS’s efforts to monitor and verify the tax liability of the taxpayer. The government is not required to prove a tax deficiency in order to convict under §7206(2).¹¹⁷United States v. Bouzanis, 2003-1 USTC ¶50,315 (N.D. Ill. 2003) (defendant who assisted in preparation of tax return that overstated income to enhance taxpayer’s creditworthiness for SBA-guaranteed loan subject to prosecution for fraudulent return preparation; court notes that elements of §7206(1) offense are applicable to aiding and abetting under §7206(2)).

Section 7206(2) was designed to reach all those who knowingly participate in providing information that would result in a materially fraudulent tax return. The section is not limited to the professional preparer. Anyone who, with the requisite intent, aids in the violation of §7206(1) may be prosecuted under subsection (2) of the statute.¹¹⁸United States v. Bryan, 896 F.2d 68 (5th Cir. 1990); United States v. Crum, 529 F.2d 1380 (9th Cir. 1976); United States v. McCrane, 527 F.2d 906 (3d Cir. 1975), vac’d on other grounds, 427 U.S. 909 (1976). Although it has been held that one must engage in “some affirmative participation which at least encourages the perpetrator,”¹¹⁹United States v. Graham, 758 F.2d 879, 885 (3d Cir. 1985). where there is evidence of willfulness a defendant can be convicted even if he or she merely caused a false return to be filed or furnished information that led to the filing of a false return.¹²⁰United States v. Scarberry, 208 F.3d 228 (10th Cir. 2000); United States v. Sassak, 881 F.2d 276 (6th Cir. 1989).

In United States v. Morrison,¹²¹833 F.3d 491 (5th Cir. 2016). the court addressed the “aiding and abetting” element of §7206(2). The taxpayer challenged his conviction by claiming that element was not met because most of the false returns were prepared by his wife and not him. The court explained that a defendant does not have to sign or prepare the return to be amenable to prosecution under §7206(2).¹²²United States v. Morrison, 833 F.3d 491 (5th Cir. 2016) (referencing United States v. Clark, 577 F.3d 273 (5th Cir. 2009); United States v. Fletcher, 322 F.3d 508 (8th Cir. 2003); United States v. Searan, 259 F.3d 434 (6th Cir. 2001); United States v. Wolfson, 573 F.2d 216 (5th Cir. 1978)). Rather, under the general aiding and abetting principles, the taxpayer must take some affirmative steps to further the crime. The court noted that much of the following evidence underpinning the taxpayer’s conspiracy convictions supported his guilt as an aider and abettor. The taxpayer: (1) co-owned the tax preparation business with his wife; (2) was the chief operating officer; (3) oversaw the entire operation; (4) prepared at least one client’s false return that included the same fraudulently-inflated Schedule C losses as those his wife prepared, which supported her §7206(2) conviction; and (5) created false personal tax returns by grossly underreporting income. Moreover, despite that the evidence was less than what the court typically had seen in §7206(2) cases, the court recognized it was sufficient to find that the taxpayer knowingly assisted in filing false returns.¹²³United States v. Morrison, 833 F.3d 491 (5th Cir. 2016) (citing United States v. Garcia, 242 F.3d 593 (5th Cir. 2001); United States v. Lombardi, 138 F.3d 559 (5th Cir. 1998)). See Nye & Nissen v. United States, 336 U.S. 613 (1949) (immaterial that evidence supported convictions under §7206(2) and 18 U.S.C. §371); United States v. Searan, 259 F.3d 434 (6th Cir. 2001) (conspiracy and §7206(2) convictions based on same evidence).

Section 7206(2) has been used to convict tax shelter promoters who had fair notice of the illegality of their tax schemes.¹²⁴United States v. Schulman, 817 F.2d 1355 (9th Cir. 1987); United States v. Crooks, 804 F.2d 1441 (9th Cir. 1986). On the other hand, the completely unsettled state of the tax laws has precluded the possibility of criminal willfulness in certain areas,¹²⁵United States v. Mallas, 762 F.2d 361 (4th Cir. 1985) (individual cannot form requisite intent to violate highly ambiguous law); United States v. Garber, 607 F.2d 92, 100 (5th Cir. 1979); United States v. Critzer, 498 F.2d 1160 (4th Cir. 1974). Cf. United States v. Drape, 668 F.2d 22 (1st Cir. 1982), in which the backdating of documents in a shelter scheme was sufficiently clear evidence of willfulness. and defendants’ convictions were reversed where, at the time they advocated a tax shelter program, there was no federal law, regulation or court decision warning that advocacy of the tax shelter would lead to criminal prosecution.¹²⁶United States v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983).

An individual may be guilty under §7206(2) even if the taxpayer himself was not aware of the false statements,¹²⁷United States v. Thetford, 676 F.2d 170 (5th Cir. 1982); United States v. Jackson, 452 F.2d 144 (7th Cir. 1971); United States v. Kelley, 105 F.2d 912 (2d Cir. 1939); United States v. Siegal, 472 F. Supp. 440 (N.D. Ill. 1979). or had not participated in any wrongdoing.¹²⁸United States v. Edwards, 230 F. Supp. 881 (D. Ore. 1964), rev’d in part on other grounds, 375 F.2d 862 (9th Cir. 1967). Such a situation may arise where promoters of a fraudulent tax shelter are chargeable for aiding in the preparation of false returns even though the taxpayers who took advantage of the improper deductions are innocent. In United States v. Salerno,¹²⁹902 F.2d 1429 (9th Cir. 1990). however, the court held that where casino employees who embezzled large sums lacked the specific intent to defraud the government by causing their employer to file a false return, evidence was insufficient to establish a violation of §7206(2). The court determined that none of the individuals involved was an officer, shareholder, or director of the corporation and there was no evidence that any of the individuals had anything to do with the preparation of the corporation’s tax returns. On the other hand, it is no defense under §7206(2) that the taxpayer was aware of the falsity of the return.¹³⁰United States v. Nealy, 729 F.2d 961, 963 (4th Cir. 1984); accord United States v. Lefkowitz, 125 F.3d 608, 618 (8th Cir. 1997).

Comment: A taxpayer may report taxable income without divulging on a tax return the illegal source of the income by claiming a Fifth Amendment privilege.¹³¹See Garner v. United States, 424 U.S. 648 (1976); Marchetti v. United States, 390 U.S. 39 (1968); Grosso v. United States, 390 U.S. 62 (1968); United States v. Sullivan, 274 U.S. 259 (1927); Conforte v. Commissioner, 692 F.2d 587 (9th Cir. 1982). Nevertheless, some taxpayers who are unaware of their Fifth Amendment rights construct an illegal “laundry” whereby they report their true income but misclassify it. For example, a bookmaker may give currency to a friendly businessman in exchange for a check and a Form 1099 in that amount reflecting “commission income.” Three problems manifest themselves:

5.   

§7207 — Submitting Fraudulent Returns, Statements or Other False Documents

Section 7207, a misdemeanor, is violated by any person “who willfully delivers or discloses to the Secretary [of the Treasury] any list, return, account, statement, or other document,” or other disclosures regarding private foundations¹³²See §6104(d). or information required as to certain retirement and bond-sharing plans under §6047(b), “known by him to be fraudulent or to be false as to any material matter.” It is also a misdemeanor to fail to notify the Secretary that an organization is a political organization under §527(i) or to fail to make the required disclosures of expenditures and contributions under §527(j).¹³³§7207. For a further discussion of the filing requirements of political organizations, see 453 T.M., Tax-Exempt Organizations — Lobbying and Political Expenditures.

In United States v. Tsanas,¹³⁴572 F.2d 340, 347 (2d Cir. 1978). the court noted that “just as §7201 is the “capstone” of tax offenses, §7207 lies at the bottom.”

The elements of §7207 are willfulness, false or fraudulent material matter, and an affirmative act of delivery or disclosure.¹³⁵Compare the §7203 misdemeanor, discussed above, which requires willfulness and a culpable omission. See also United States v. Coppola, 425 F.2d 660, 661–62 (2d Cir. 1969).

Section 7207 differs from the more serious §7206(1) in that the latter requires a subscription under penalties of perjury while the former does not; liability can attach under §7207 even when the taxpayer delivers a document prepared and signed by another person.¹³⁶Liability can attach in this situation only if the taxpayer knows the document contains a material falsehood. See United States v. Bishop, 412 U.S. 346, 357–58 (1973). Moreover, while attempted evasion under §7201 requires an actual tax deficiency, the §7207 offense does not;¹³⁷See Sansone v. United States, 380 U.S. 343, 352 (1965). the fact that a false statement does not actually influence the IRS is immaterial.¹³⁸United States v. Fern, 696 F.2d 1269 (11th Cir. 1983). In United States v. Bishop,¹³⁹412 U.S. 346 (1973). the Supreme Court ruled that if, on the facts of the case, the elements of the §7206(1) felony are made out and “completely encompass” the lesser offense, the defendant is not entitled to a jury charge permitting a finding of not guilty under §7206(1), but guilty under §7207. In other words, the government may insist on the felony conviction.¹⁴⁰United States v. Bishop, 412 U.S. 346, 361 (1973). See also United States v. Tsanas, 572 F.2d 340, 347–48 (2d Cir. 1978), where the court denied defendant’s contention that both §7206(1) and §7207 should have been charged as lesser-included offenses under §7201.

The “exculpatory no”¹⁴¹Under certain circumstances, the “exculpatory no” doctrine prohibits prosecution of individuals for false or fraudulent statements made in response to questioning initiated by the government where a truthful statement would have incriminated the individual. United States v. Steele, 896 F.2d 998, 1001 (6th Cir. 1990). See I.B.2., below. defense apparently is not available to a defendant charged with submitting false documents to an agent during an audit where the IRS was not conducting a tax fraud investigation at the time it requested the documentation and the documents impaired the ability of the IRS to determine and assess taxes.¹⁴²United States v. Galaniuk, 738 F. Supp. 225 (E.D. Mich. 1990).

In a prosecution brought under §7207, venue is proper in the judicial district in which the false document is delivered or disclosed to the IRS.¹⁴³United States v. Hoover, 233 F.2d 870 (3d Cir. 1956). Upon conviction of this misdemeanor, the defendant may be fined up to $10,000 ($50,000 in the case of a corporation), or imprisoned not more than one year, or both.¹⁴⁴§7207. Under the Criminal Fine Enforcement Act of 1984,¹⁴⁵See I.A.4., above. the maximum fine is $100,000 for individuals and $200,000 for corporations.¹⁴⁶18 U.S.C. §3571.

6.   

§7212(a) — Attempts to Interfere With Administration of Internal Revenue Laws

Section 7212(a) covers two broad categories of tax crimes. The first clause of §7212(a), corrupt or forcible interference, makes any threats or forcible endeavor designed to interfere with Internal Revenue employees a felony.¹⁴⁷United States v. Przybyla, 737 F.2d 828 (9th Cir. 1984). See United States v. Lovern, 293 F.3d 695 (4th Cir. 2002) (taxpayer guilty of crime under §7212 where he made intimidating statements to Treasury Inspector General for Tax Administration special agent acting in his official capacity). The other portion of the statute, corrupt endeavors to impede, known as the “omnibus clause,” prohibits any act which obstructs or impedes or endeavors to obstruct or impede, the due administration of the Code.¹⁴⁸United States v. Ballard, 850 F.3d 292 (6th Cir. 2017), discussed the two different sentencing guidelines available under §7212(a)’s omnibus clause, depending upon the nature of the interference with tax administration. The taxpayer was charged with one false statement to the IRS about his income, and the court held that this was sufficient to invoke the more severe sentencing guideline for tax evasion rather than the less severe guideline for obstruction of justice. See also United States v. Popkin, 943 F.2d 1535, 1538–39 (11th Cir. 1991); United States v. Williams, 644 F.2d 696, 699 (8th Cir. 1981).

The basic elements of a prima facie case are: (1) the use of force or threats of force; (2) to intimidate, impede or obstruct; (3) an officer or employee of the United States government acting in his or her official capacity under Title 26.¹⁴⁹See United States v. Lovern, 293 F.3d 695, 700 (4th Cir. 2002), United States v. Przybyla, 737 F.2d 828, 830 (9th Cir. 1984).

The omnibus clause generally is reserved for conduct occurring after a tax return has been filed, where the actions by the taxpayer or other person has impeded or obstructed the audit or investigation.¹⁵⁰U.S. Department of Justice Tax Division Directive No. 129 (2012). The statute generally covers the same type of conduct chargeable under the federal criminal conspiracy statute,¹⁵¹18 U.S.C. §371. See I.B.1., below. but is used when that section is unavailable due to insufficient evidence of a conspiracy. Section 7212(a) is sometimes referred to as the “single-person conspiracy” statute.

The statute may be utilized for specific acts of obstruction during the course of an audit or criminal investigation and when individuals, such as tax protest promoters, engage in large-scale conduct involving actual and potential tax returns of third parties.¹⁵²U.S. Department of Justice Tax Division Directive No. 129 (2012).

Three elements must be established to demonstrate a violation of the omnibus clause. To establish a prima facie case, the government must prove the defendant conducted (1) a corrupt effort, endeavor, or attempt; (2) to impede, obstruct, or interfere with; (3) due administration of Title 26.¹⁵³See United States v. Wilson, 118 F.3d 228, 234, (4th Cir. 1997); United States v. Williams, 644 F. 2d 696, 699 (8th Cir. 1981) (superseded by stature on other grounds), cert. denied, 454 U. S. 841 (1981).

“Corruptly” means to act with the intent to secure an unlawful advantage or benefit for either oneself or another.¹⁵⁴United States v. Popkin, 943 F.2d 1535, 1540 (11th Cir. 1991); United States v. Maynard, 984 F.3d 948 (10th Cir. 2020) (defendant corruptly endeavored to obstruct or impede due administration of internal revenue laws by knowingly obstructing or impeding investigation through his closing and opening of corporate accounts to avoid paying federal payroll taxes, making false statements to IRS employee, transferring funds from a corporate account to his personal account to avoid IRS levies, and omitting material information from submissions to IRS to prevent IRS from collecting from customers). “Section 7212(a) is directed at efforts to bring about a particular advantage such as impeding collection of one’s taxes, taxes of another, or the auditing of one’s or another’s tax records.”¹⁵⁵United States v. Reeves, 752 F.2d 995, 998 (5th Cir. 1985). See United States v. Hansen, No. 2:16-cr-00534-HCN, 2020 BL 234821 (D. Utah Jun. 24, 2020) (defendant’s mailing of checks drawn on closed bank accounts to multiple IRS offices in attempt to convince the IRS to retire defendant’s debt falls within requirements of §7212(a)). The benefit sought under the statute by the defendant may be financial, but need not be.¹⁵⁶United States v. Dykstra, 991 F.2d 450, 453 (8th Cir. 1993) (financial gain); United States v. Yagow, 953 F.2d 423, 427 (8th Cir. 1992) (financial motive is not the only benefit which satisfies corrupt element of §7212(a)). However, mere harassment of an agent, if not done to obtain some undue advantage, may not rise to the level of a §7212(a) violation.¹⁵⁷United States v. Reeves, 752 F.2d 995, 999 (5th Cir. 1985) (harassment just to annoy agent is not to be condoned, but is not per se “corrupt” under the statute).

Corrupt conduct chargeable under the omnibus clause need not be directed at individual officers or employees of the IRS.¹⁵⁸United States v. Dykstra, 991 F.2d 450, 452 (8th Cir. 1993). The act engaged in by the party need not be illegal as long as it is done for a corrupt purpose.¹⁵⁹United States v. Popkin, 943 F.2d 1535, 1537 (11th Cir. 1991) (attorney acted corruptly where he created corporation expressly for purpose of enabling defendant to disguise character of illegally earned income and repatriated from foreign bank).

The term “endeavor” as used in the statute is any effort to do or accomplish the evil purpose the section was intended to prevent.¹⁶⁰United States v. Martin, 747 F.2d 1404, 1409 11th Cir. 1984) (citing Osborn v. United States, 385 U.S. 323, 333 (1966)).

Comment: The omnibus clause of §7212(a) has been used more frequently in recent years by the government in charging taxpayers as an addition to the substantive tax crimes charged. It has also been used more frequently against tax advisors. In United States v. Popkin,¹⁶¹943 F.2d 1535 (11th Cir. 1991). where an attorney was prosecuted under the omnibus clause for creating a corporation (a legal act) intended to assist a client in avoiding the reporting of taxable income from drug transactions, it was demonstrated that the attorney was acting “corruptly,” i.e., with an intent to secure some unlawful advantage for his client.

The final element is the impeding or the obstruction, or an attempt to impede or obstruct the due administration of the Internal Revenue laws. This could include impeding or obstructing the collection of one’s own taxes, taxes of another, or the investigation of one’s or another’s tax records.¹⁶²United States v. Kuball, 976 F.2d 529, 531 (9th Cir. 1992). See United States v. Bowman, 173 F.3d 595 (6th Cir. 1999) (individual’s deliberate filing of false forms with the IRS to initiate action against a taxpayer is encompassed within §7212(a)’s proscribed conduct). The statute covers “attempts” and a defendant’s action need not necessarily have an adverse effect on a government investigation to be a violation of §7212(a).¹⁶³United States v. Rosnow, 977 F.2d 399 (8th Cir. 1992).

In United States v. Marinello,¹⁶⁴138 S. Ct. 1101 (2018), rev’g 839 F.3d 209 (2d Cir. 2016). the Supreme Court concluded that a defendant can be convicted on obstruction charges under the omnibus clause only if the government can prove that the defendant was aware of a pending tax-related proceeding or that the defendant could “reasonably foresee that such a proceeding would commence” and that there was “nexus” between the defendant’s acts and the investigation.¹⁶⁵138 S. Ct. 1101, 1110 (2018). See, e.g., United States v. Takesian, 945 F.3d 553 (1st Cir. 2019) (defendant could reasonably foresee proceeding against him given that he knew IRS was investigating his business which would eventually lead to discovery of $1 million he took from business for his own use and failed to report on his personal return). See also United States v. Scali, 820 Fed. Appx. 23 (2d Cir. 2020) (providing jury with special verdict form requiring jury to indicate whether it unanimously found that defendant committed obstructive acts after becoming aware of a pending IRS proceeding while Supreme Court Marinello decision was pending was not in error; defendant concealed funds and structured cash transactions to evade reporting requirements after IRS began to request un-filed personal and corporate returns); United States v. Flynn, 969 F.3d 873 (8th Cir. 2020) (declining to extend Marinello to Klein conspiracies); United States v. Herman, 997 F.3d 251 (5th Cir. 2021) (same). The Marinello court also specified that the omnibus clause as a whole refers to interference with targeted tax-related proceedings, such as a particular investigation or audit.¹⁶⁶138 S. Ct. at 1104.

When interpreting the Marinello decision, courts have determined that the government must show nexus at trial, not in the indictment.¹⁶⁷United States v. Prelogar, 966 F.3d 526 (8^th Cir. 2021), aff’g No. 4:17-CR-00248-BP, 2018 BL 405782 (W.D. Mo. Nov. 2, 2018); United States v. Guirguis, No. 17-00487 HG, 2018 BL 391323 (D. Haw. Oct. 23, 2018). The Department of Justice Tax Division recently updated it Criminal Tax Manual to address the changes required by the Marinello decision.¹⁶⁸See DOJ Criminal Tax Manual §17.

The nexus element described in Marinello requires the government to prove the defendant’s acts are related in “time, causation or logic” to the official proceeding.¹⁶⁹138 S. Ct. 1101, 1106 (2018) (quoting United States v. Aguilar, 515 U.S. 593 (1995)). For example, the time and logic components were met in United States v. Sutherland,¹⁷⁰921 F.3d 421 (4th Cir. 2019) (court applied Marinello principles to uphold defendant’s conviction for 18 U.S.C. §1512(c)(2) obstruction of grand jury investigation). when the defendant gave the U.S. Attorney’s Office (USAO) fake loans documents after a grand jury subpoenaed him for related financial records. The court established the causal relationship between the defendant’s actions and the grand jury based on the “likelihood that the [USAO] would serve as a channel or conduit to the grand jury for the false evidence or testimony presented to it.”¹⁷¹United States v. Sutherland, 921 F.3d 421 (4th Cir. 2019). Essentially, the defendant presenting false loan documents to the USAO “had one intended and foreseeable consequence: transmission of those documents to the grand jury.”¹⁷²United States v. Sutherland, 921 F.3d 421 (4th Cir. 2019) (referencing United States v. Reich, 479 F.3d 179, 185 (2d Cir. 2007)). Thus, the nexus element was met and the Sutherland court affirmed defendant’s obstruction conviction.

Similarly, a defendant’s conviction for obstruction was affirmed by the Eighth Circuit after the district court’s finding that there was nexus between the defendant’s attempt to use a falsified bill of exchange to pay a $3.6 million tax bill and the IRS’s attempts to collect through notices, liens and levies over a period of years. The Eighth Circuit explained that, for years, the IRS took targeted administrative action against the defendant well beyond the “ordinary course” of the agency’s interaction with taxpayers. It began to take specific steps to collect on the defendant’s tax debt in 2009, and assigned two revenue officers to his case over a five-year period. These officers issued him notices of liens and levies and oversaw the seizure and sale of some of his property. And only weeks before he submitted the fraudulent international bill of exchange, the IRS sent him yet another notice of levy reminding him that he owed about $3.6 million, and he even attached a copy of the notice to the $3.6 million bill of exchange that he provided to the IRS. In sum, the Eighth Circuit concluded that the IRS’s regular and persistent contact with the defendant went well beyond the “routine, day-to-day work” of the agency and thus there was no difficulty concluding that this collection action qualified as a “targeted administrative action.”¹⁷³See United States v. Graham, 981 F.3d 1254 (11th Cir. 2020).

Before the Supreme Court’s decision in Marinello, there was some question regarding whether a conviction under the §7212(a) omnibus clause required proof of the existence of or the defendant’s knowledge of an ongoing investigation. Of the six Circuits that had addressed the issue, four concluded that no such proof was required.¹⁷⁴United States v. Floyd, 740 F.3d 22 (1st Cir. 2014); United States v. Massey, 419 F.3d 1008 (9th Cir. 2005); United States v. Sorensen, 801 F.3d 1217 (10th Cir. 2015), cert. denied, 136 S. Ct. 1163 (2016); United States v. Westbrooks, 858 F.3d 317 (5th Cir. 2017), vac’d in part, rem’d in part, 728 F. App’x 379 (5th Cir. 2018), on remand from 138 S. Ct. 1323 (2018). Note that the Fifth Circuit overturned the conviction in Westbrooks after the Supreme Court remanded the case for consideration in light of Marinello. Westbrooks, 728 F. App’x at 380. The Fifth Circuit determined that the obstruction conviction was no longer valid because the jury’s consideration of the taxpayer’s failure to maintain adequate records and only pay employees with cash failed to satisfy Marinello. However, the court explained that consideration of the taxpayer’s false testimony at a show cause hearing was appropriate because it related to compliance with an IRS subpoena. Westbrooks, 728 F. App’x at 380.

In contrast to the other circuits, the Sixth Circuit had construed the omnibus clause as requiring proof that a defendant was aware of some pending IRS action, such as a subpoena, audit, or criminal tax investigation, when the potentially impeding conduct happened.¹⁷⁵United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998); United States v. Miner, 774 F.3d 336 (6th Cir. 2014) (reaffirming Kassouf). The Sixth Circuit construed the language of §7212 consistent with the general obstruction statute¹⁷⁶18 U.S.C. §1503. to require that there be some pending IRS proceeding. The Sixth Circuit was concerned that a broader interpretation of the omnibus clause would open the statute to challenge on overbreadth and vagueness grounds, because it could then apply to any conduct that merely had the potential to make it more difficult for the IRS to assess taxes or locate taxpayer assets at some point in the future.

The courts have agreed that §7212 conduct to interfere with the administration of the Internal Revenue Laws is subject to a six-year statute of limitations.¹⁷⁷§6531(6). See United States v. Giambalvo, 810 F.3d 1086 (8th Cir. 2016) (citing United States v. Boykoff, 67 F. App’x 15 (2d Cir. 2003)); United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998); United States v. Kelly, 147 F.3d 172, 177 (2d Cir. 1998); United States v. Workinger, 90 F.3d 1409 (9th Cir. 1996)). In United States v. Giambalvo,¹⁷⁸810 F.3d 1086 (8th Cir. 2016). the court recognized that the six-year limitations period under §6531(6) quotes only the first part of §7212(a) “(relating to intimidation of officers and employees of the United States).” However, the circuit court explained that the §6531(6) parenthetical language is explanatory, not limiting, and therefore, the six-year statute of limitations applies to all attempts to interfere with tax law pursuant to §7212.

7.   

§7216 — Unlawful Disclosures

Return preparers who knowingly or recklessly make unauthorized disclosures or use of information furnished in connection with the preparation of an income tax return are subject to criminal sanctions under §7216.¹⁷⁹Section 7216(b) provides exceptions to the disclosure bar without taxpayer consent. See, e.g., Odyssey Reinsurance Co. v. Nagby, No. 116-CV-3038-BTM(WVG), 2018 BL 111088 (E.D. Cal. Mar. 29, 2018) (court order to preparer to disclose returns and financial documents to plaintiff seeking to enforce a judgment against the defendants). A violation of §7216 is a misdemeanor, with a maximum penalty of up to one year imprisonment or a fine of not more than $1,000, or both, together with the costs of prosecution. Section 6713(a) prescribes a related civil penalty for unauthorized disclosures or uses of information furnished in connection with the preparation of an income tax return. The penalty for violating §6713 is $250 for each disclosure or use, not to exceed a total of $10,000 for a calendar year.

Under the regulations, a tax return preparer may not disclose or use a taxpayer’s tax return information before obtaining a written consent from the taxpayer. The taxpayer’s consent must be specific, knowing and voluntary.¹⁸⁰Reg. §301.7216-3(a). Reg. §301.7216-3(a)(3)(i) prescribes the form and content requirements that all consents to disclose or use must include. Any consent to disclose or consent to use tax return information obtained on or after January 1, 2014, must contain the mandatory language in Rev. Proc. 2013-14. Rev. Proc. 2013-19. A “tax return preparer” generally is someone engaged in the business of preparing or assisting in preparing tax returns, including those who provide auxiliary services such as developing software to prepare or e-file a return.¹⁸¹Reg. §301.7216-1(b)(2). The regulations apply to paid preparers, software developers, Electronic Return Originators (EROs), and other persons or entities engaged in tax return preparation services or services that are auxiliary to return preparation. They also apply to most volunteer tax preparers, for example Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) volunteers and employees and contractors employed by tax preparation companies in a support role.

The IRS issued Rev. Proc. 2013-14, providing specific guidance to tax return preparers on requirements for format and content of taxpayer consents to disclose, and consents to use tax return information for taxpayers filing a return in the Form 1040 series (e.g., Form 1040 or Form 1040NR) under Reg. §301.7216-3.¹⁸²Rev. Proc. 2013-19, modifying Rev. Proc. 2013-14 (extending effective date to January 1, 2014, for requirement that any consent to disclose or consent to use tax return information obtained on or after January 1, 2014, must contain the mandatory language in Rev. Proc. 2013-14). See Rev. Proc. 2013-14 for examples of the mandatory statements to be included in the consent. The IRS also provided specific requirements for electronic signatures when a taxpayer executes an electronic consent to the disclosure or consent to the use of the taxpayer’s tax return information.

Rev. Proc. 2013-14 requires: (1) except as provided under Reg. §301.7216-3(c)(1) for multiple disclosures or multiple uses within a single consent form, the taxpayer’s consent to each separate disclosure or separate use of return information be contained on a separate written document, either on paper or electronic; (2) a consent furnished on paper be on one or more sheets of 8.5 inch by 11 inch or larger paper and pertain solely to the disclosure or use authorized by the consent; (3) a consent furnished electronically be on one or more computer screens and pertain solely to the disclosure or use authorized by the consent; (4) every consent include certain mandatory statements depending upon the circumstances of the use or disclosure of the return information; (5) all consents contain the taxpayer’s affirmative consent (i.e., “opt out” consents are not permitted); (6) all consents must be signed by the taxpayer; (7) while disclosure consents and use consents must be provided in separate documents, multiple disclosures or multiple uses may be provided within a single consent form provided that the form provides the taxpayer with an opportunity to affirmatively select each separate disclosure or use; (8) if a consent authorizes the disclosure of the taxpayer’s entire tax return or all information contained within a return, the consent provides the taxpayer the ability to request a more limited disclosure of tax return information as the taxpayer may direct; and (9) where a tax return preparer located within the United States may disclose a taxpayer’s social security number to a tax return preparer located outside of the United States or any territory or possession of the United States with the taxpayer’s consent, both the tax return preparer located within the United States and the tax return preparer located outside of the United States maintain an adequate data protection safeguard at the time the taxpayer’s consent is obtained and when making the disclosure.¹⁸³Rev. Proc. 2013-14.

If the taxpayer furnishes consent to disclose or consent to use tax return information electronically, the taxpayer must furnish the tax return preparer with an electronic signature that will verify that the taxpayer knowingly and voluntarily consented to the disclosure or use. Return preparers seeking to obtain a taxpayer’s consent to the disclosure or consent to the use of tax return information electronically must obtain the taxpayer’s signature on the consent by either assigning a personal identification number (PIN) that is at least five characters long to the taxpayer, or having the taxpayer type in the taxpayer’s name and then hit “enter” to authorize the consent.¹⁸⁴Rev. Proc. 2013-14.

The tax return preparer must provide a copy of the executed consent to the taxpayer at the time of execution.¹⁸⁵Reg. §301.7216-3(c)(3). The taxpayer and tax return preparer may agree to specify the period of time the consent will be effective and include the period in the consent form. If no period is specified the regulations state that the consent will be effective for a period of one year from the date the taxpayer signed the consent.¹⁸⁶Reg. §301.7216-3(b)(5).

A tax return preparer may not present a consent form with blank spaces related to the purpose of the consent to the taxpayer for signature.¹⁸⁷Rev. Proc. 2013-13, §5.04(4). Further, conditioning the provision of any services on the taxpayer’s furnishing consent renders the consent involuntary.¹⁸⁸Reg. §301.7216-3(a)(1). Generally, information known to one member of a firm is imputed to the entire firm.¹⁸⁹Model Rules of Prof’l. Conduct R. 1.10.

“Tax return information” includes the name, address and identifying number of the taxpayer together with other information furnished to the preparer in connection with the preparation of the return from the taxpayer, a third party or from the IRS.¹⁹⁰Reg. §301.7216-1(b)(3). It also includes all computations, worksheets, and printouts preparers create; correspondence from IRS during the preparation, filing and correction of returns; statistical compilations of tax return information; and tax return preparation software registration information.¹⁹¹Reg. §301.7216-1(b)(3). Information is considered “in connection with tax return preparation,” and is therefore tax return information, if the taxpayer would not have furnished the information to the preparer but for the intention to engage, or the engagement of, the preparer to prepare the return.¹⁹²Reg. §301.7216-1(b)(3)(i)(D).

Uses of tax return information are occurrences where tax return preparers refer to, or rely on, tax return information as the basis to take or permit actions.¹⁹³Reg. §301.7216-1(b)(4). The regulations authorize tax return preparers to use specified tax return information without a taxpayer’s prior written consent under certain circumstances: e.g., to create lists for solicitation of tax return business; to produce statistical information in connection with a tax return preparation business.¹⁹⁴These and other exceptions can be found in Reg. §301.7216-2. All other uses not specifically authorized require tax return preparers to secure from taxpayers advance signed consents authorizing the uses.

Disclosure of tax return information is the act of making it known to any person in any manner whatsoever.¹⁹⁵Reg. §301.7216-1(b)(5). The regulations provide limited exceptions allowing preparers to disclose tax return information without a taxpayer’s prior written consent under certain limited circumstances, such as disclosures to the IRS, other taxing jurisdictions or the courts (which includes the grand jury); disclosures to other U.S.-based tax return preparers that assist in preparing the return; and disclosures for the purpose of obtaining legal advice.¹⁹⁶See Reg. §301.7216-2. All other disclosures not specifically authorized require tax return preparers to obtain the taxpayer’s specific consent, before disclosing the information.

Disclosing tax return information to another tax return preparer that is assisting in the preparation of the return or providing auxiliary services in connection with the return preparation generally does not require the taxpayer’s consent.¹⁹⁷Reg. §301.7216-2(d)(1). However, if the other tax return preparer is located outside the United States or any territory or possession of the United States, the taxpayer must agree and sign a form consenting to the disclosure.¹⁹⁸Reg. §301.7216-2(c)(4) (Ex. 4).

Generally, tax return preparers may not obtain consents to disclose SSNs to tax return preparers located outside the United States or any territory or possession of the United States. If SSNs are included in documents for which the tax return preparer has obtained the consent of the taxpayer to disclose, the tax return preparer must redact or mask any SSN before disclosing the tax return information to a return preparer outside the United States.¹⁹⁹Reg. §301.7216-3(b)(4)(i). Under an exception, however, SSNs may be disclosed to tax return preparers located outside the United States if taxpayer consent is obtained and both the sending and receiving tax return preparers maintain “adequate data protection safeguards.”²⁰⁰Reg. §301.7216-3(b)(4)(ii). An “adequate data protection safeguard” is a security program, policy and practice that has been approved by management and implemented that includes administrative, technical and physical safeguards to protect tax return information from misuse or unauthorized access or disclosure and that meets or conforms to a specified privacy or data security framework, which may include the requirements of the AICPA/CICA Privacy Framework or any other data security framework that provides the same level of privacy protection as contemplated by the AICPA/CICA Privacy Framework.

8.   

Statute of Limitations for Internal Revenue Code Offenses

An indictment must be brought within six years of the commission of the offense for most tax crimes,²⁰¹Section 6531 actually creates a general three-year limitation period for prosecution of tax crimes, but the six-year “exceptions” encompass virtually all tax crimes prosecuted with any frequency. See, e.g., United States v. Giambalvo, 810 F.3d 1086 (8th Cir. 2016) (§7212 subject to six-year statute of limitations); United States v. Hayes, 322 F.3d 792 (4th Cir. 2003) (absence of explicit reference to §7206(2) within §6531 does not preclude application of six-year limitations period; language in §6531(3) is virtually identical to §7206(2); the only omission is reference that defendant’s false statements related to a material matter); United States v. Workinger, 90 F.3d 1409 (9th Cir. 1996) (six-year statute of limitations applies to count charging individual with corruptly obstructing and impeding due administration of tax laws by submitting inaccurate financial forms to IRS); United States v. Gollapudi, 947 F. Supp. 763 (D.N.J. 1996), aff’d, 130 F.3d 66 (3d Cir. 1997) (six-year statute applies to criminal action under §7202 against corporate officer for willfully failing to collect, account for, and pay over payroll taxes to the government); United States v. Brennick, 908 F. Supp. 1004 (D. Mass. 1995) (six-year exception to three-year limitations period for criminal prosecutions applicable to offense described in §7203, not §7202). But see United States v. Heinze, 361 F. Supp. 46, 54 (D. Del. 1973), where a three-year limitation period was applied to a charge of conspiracy to violate §7206(2). including the following offenses:

The statute of limitations is tolled when the offender is outside the United States or is a fugitive from justice.²⁰⁷§6531 (flush language). Additionally, the offender may voluntarily waive the statute of limitations.²⁰⁸§6531.

In the tax area, most disputes about the statute of limitations center on determining when the “offense” was committed. When the willful act is alleged to be the filing of a false return under §7201 and §7206(1), the crime generally is deemed to have been committed when the return was actually filed (not on the due date), and the first day of the six-year limitation period is the day after filing.

It is clear, however, that the willful act in a tax evasion case can occur after the filing of a false return. For example, because false statements made to Treasury representatives during an investigation of the return constitute the completion of the crime, the statute commences to run at the time the false statements are made.²⁰⁹United States v. Beacon Brass Co., Inc., 344 U.S. 43 (1952). Thus, in United States v. Sams, 865 F.2d 713 (6th Cir. 1988), the statute did not begin to run when the defendant’s return was due or when he actually filed the return, but when the failure to pay the tax became willful. When the due date for a return has been extended by an agreement between the taxpayer and the IRS, the statute of limitations for crimes based upon a false return begins to run when the return is actually filed, not when the return was originally due.²¹⁰United States v. Habig, 390 U.S. 222 (1968). On the other hand, if a fraudulent return is filed before its due date, the six-year limitations period does not begin running until the actual due date.²¹¹United States v. Habig, 390 U.S. at 225. When the statutory due date falls on a Saturday, Sunday or legal holiday, the due date remains unchanged, i.e., the statutory due date is used regardless of the day of the week. Thus, for example, where a return containing a false statement was filed on April 15, 2007 — when the due date was April 17, 2007 — a criminal indictment brought on April 16, 2013, was untimely and had to be dismissed.²¹²United States v. Johnson, 659 F. App’x 311 (6th Cir. 2016) (unpub. op.). In 2020, the IRS progressively extended the due dates for a variety of federal tax filings and payments. For any return due in 2020, special care should be taken to determine the applicable legal due date for the purposes of determining the expiration of the six-year statute of limitation for prosecution of many tax crimes.

For the offense of willful failure to file a return,²¹³§7203. the crime is ordinarily completed and the limitation period starts to run on the day the return is due, taking any extension periods into account.²¹⁴United States v. Twining, 75-2 USTC ¶9768 (N.D. Cal. 1975).

The six-year statute of limitations for prosecution of a taxpayer who commits a series of evasive acts over several years after incurring a tax liability begins to run on the date of the last evasive act, according to the Tenth Circuit in United States v. Anderson.²¹⁵319 F.3d 1218 (10th Cir. 2003). In Anderson, the taxpayer failed to report two deposits of $50,000 each placed in a Swiss bank account in 1991. In 1993–1996, the taxpayer denied any interest in a foreign bank account. The court held that the six-year statute for evasion did not begin to run until the due date of the 1996 return. In so holding, the court noted that a number of other circuits have followed suit.²¹⁶See United States v. Wilson, 118 F.3d 228 (4th Cir. 1997); United States v. Winfield, 960 F.2d 970 (11th Cir. 1992); United States v. DeTar, 832 F.2d 1110 (9th Cir. 1987); United States v. Trownsell, 367 F.2d 815 (7th Cir. 1966).

1.   

Conspiracy to Defraud the United States — 18 U.S.C. §371

Section 371 of Title 18 describes two separate offenses: (1) conspiracy to commit an offense against the United States; and (2) conspiracy to defraud the United States or agency thereof.²¹⁷See the Worksheets, below, for an example of an indictment for conspiracy. Conspiracy to defraud the United States is a felony,²¹⁸United States v. Tuohey, 867 F.2d 534, 538 (9th Cir. 1989); United States v. Segal, 852 F.2d 1152, 1157 (9th Cir. 1988). Note: A conspiracy to defraud the United States conviction can result in a vulnerable victim sentencing enhancement. See United States v. Adeolu, 836 F.3d 330 (3d Cir. 2016) (three-part test determined that enhancement applied, which did not require proof that victim suffered actual harm). while conspiracy to commit an offense against the United States is only a felony if the object of the conspiracy is a felony.²¹⁹Williams v. United States, 238 F.2d 215 (5th Cir. 1956). See United States v. Little, 753 F.2d 1420, 1444 (9th Cir. 1984). Both offenses require an agreement and an overt act committed in furtherance thereof.²²⁰United States v. Brown, 809 F.2d 397 (7th Cir. 1987); United States v. Maynard, 984 F.3d 948 (10th Cir. 2020) (defendants conspired to defraud IRS for purpose of obstructing IRS’s assessment and collection of taxes owed by corporation and committed overt acts in furtherance thereof by repeatedly transferring money from corporate account to defendant’s personal account, contacting customers to suggest IRS levies were sent in error, failing to disclose to IRS corporate customers who may not have received levy notices and omitting account information from form sent to IRS). A conspirator, therefore, is one who cooperates with others for the specific purpose of furthering a common unlawful end.²²¹United States v. Peoni, 100 F.2d 401, 403 (2d Cir. 1938). See United States v. Goldberg, 105 F.3d 770 (1st Cir. 1997) (to be convicted for conspiracy to defraud, it is not necessary that conspirators have as their main purpose the aim of frustrating IRS). Thus, knowledge, approval, or acquiescence in the purpose of the conspiracy is insufficient to make one a conspirator absent an agreement to cooperate.²²²United States v. Edwards, 488 F.2d 1154, 1158 (5th Cir. 1974). See also United States v. Falcone, 109 F.2d 579, 581 (2d Cir. 1940), aff’d, 311 U.S. 205 (1940), where Judge Learned Hand described a conspirator as one who “must in some sense promote [the] venture himself, make it his own, [and] have a stake in its outcome.” The statute often is used in cases of Code violations involving several defendants, as where corporate officers and/or employees participate in the filing of the corporate tax return.²²³See, e.g., United States v. Haskell, 327 F.2d 281 (2d Cir. 1964), cert. denied, 377 U.S. 945 (1964).

A conspiracy charge is a separate offense from the substantive crime a defendant conspires to commit.²²⁴See Pinkerton v. United States, 328 U.S. 640, 643–44 (1946). Thus, a defendant may be charged with conspiracy to commit tax evasion along with separate substantive charges of tax evasion. Acquittal on the conspiracy charge does not bar conviction on the substantive offense; similarly, acquittal on the substantive offense does not bar conviction on the conspiracy charge.²²⁵See, e.g., United States v. Hughes Aircraft Co., 20 F.3d 974, 980 (9th Cir. 1994) (affirming conspiracy conviction and acquittal on false statements counts); United States v. Stevens, 909 F.2d 431 (11th Cir. 1990) (overturning conspiracy conviction while affirming false claims and false statements convictions). Nevertheless, where the government’s conspiracy theory is dependent solely upon a defendant’s knowledge of, and assistance with, the substantive count, acquittal on the substantive count necessitates acquittal on the conspiracy count.²²⁶See United States v. Campbell, 64 F.3d 967, 975 (5th Cir. 1995).

The government must prove beyond a reasonable doubt the four elements of the offense: (1) an agreement between two or more parties; (2) to commit an offense against the United States; or to defraud the United States; (3) an overt act by at least one conspirator in furtherance of the agreement; and (4) the requisite intent to defraud or to commit the substantive offense.²²⁷United States v. Parks, 68 F.3d 860 (5th Cir. 1995); United States v. Knox, 68 F.3d 990 (7th Cir. 1995); United States v. Dolt, 27 F.3d 235, 238 (6th Cir. 1994); United States v. Indelicator, 800 F.2d 1482, 1483 (9th Cir. 1986).

To prove the existence of an agreement, the government must show the conspirators tacitly reached a mutual understanding to commit an offense against the United States, and at least one act must be undertaken in furtherance of the agreement.²²⁸United States v. Falcone, 311 U.S. 205, 210 (1940); United States v. White, 492 F.3d 380, 395 (6th Cir. 2007), United States v. Williams, 469 F.3d 963, 967 (11th Cir. 2006); United States v. Williams, 340 F.3d 563, 568 (8th Cir. 2003); United States v. Fletcher, 322 F.3d 508, 513–514 (8th Cir. 2003); United States v. Monroe, 552 F.2d 860, 864 (9th Cir. 1977), cert. denied, 431 U.S. 972 (1977). However, the government need not prove that there existed a formal agreement in writing or otherwise, only that there was an understanding among conspirators sufficient to constitute an agreement to commit an unlawful act.²²⁹United States v. Armstrong, 16 F.3d 289, 293–94 (8th Cir. 1994); United States v. Acosta, 17 F.3d 538, 544 (2d Cir. 1994). Circumstantial evidence may be used to prove the agreement or the agreement may be inferred from the defendants’ actions.²³⁰Glasser v. United States, 315 U.S. 60, 80 (1942); United States v. Sneed, 63 F.3d 381, 385–86 (5th Cir. 1995); United States v. Arutunoff, 1 F.3d 1112, 1116 (10th Cir. 1993); United States v. Mubayyid, 658 F.3d 35 (1st Cir. 2011) (nearly identical Forms 990 filed for different years by defendants showing same fraudulent benevolent accomplishments to maintain organization’s tax-exempt status to hide its jihadist activities are sufficient evidence of conspiracy). Co-conspirators may join the conspiracy at any time during its course.²³¹Blumenthal v. United States, 332 U.S. 539, 557–58 (1947).

The conspiracy must be between two or more parties. If the conspiratorial agreement is only between two actors, and one of them is a government agent, a conspiracy conviction cannot be sustained.²³²See United States v. Dimeck, 24 F.3d 1239, 1242 n.6 (10th Cir. 1994; United States v. Vasquez, 874 F.2d 1515, 1516–17 (11th Cir. 1989). For example, the IRS may not base a conspiracy charge to commit tax evasion on an agreement reached between a taxpayer and an undercover government agent posing as a tax preparer to submit false tax returns. In such “sting” situations, the IRS more recently has used other statutes, in particular, §7212, to prosecute the taxpayer.²³³See discussion at I.A.6., above.

With respect to a defendant’s knowledge of the conspiratorial agreement and voluntary participation in it, the government need not prove that the defendant knew all the details or objects of the conspiracy or all the participants in it.²³⁴See Blumenthal v. United States, 332 U.S. 539, 557 (1947); United States v. Brandon, 17 F.3d 409, 428 (1st Cir. 1994), cert. denied, 513 U.S. 820 (1994); United States v. Wiley, 846 F.2d 150, 153 (2d Cir. 1988); United States v. Donsky, 825 F.2d 746, 753–54 (3d Cir. 1987). The government may use circumstantial evidence, like the acts committed by the defendant in furtherance of the objectives of the conspiracy, to show that the defendant was a knowing and voluntary participant in the conspiracy.²³⁵United States v. Carr, 25 F.3d 1194, 1201 (3d Cir. 1994); United States v. Williams, 12 F.3d 452, 459 (5th Cir. 1994); United States v. Hooks, 848 F.2d 785, 792 (7th Cir. 1988); United States v. Mubayyid, 658 F.3d 35 (1st Cir. 2011) (nearly identical Forms 990 filed for different years by defendants showing same fraudulent benevolent accomplishments to maintain organization’s tax-exempt status to hide its jihadist activities are sufficient evidence of conspiracy). Once the government proves the existence of the conspiracy, it need only show that the defendant had a “slight connection” to the conspiracy to prove that he was a member of the conspiracy.²³⁶United States v. Whittington, 26 F.3d 456, 465 (4th Cir. 1994); United States v. Agofsky, 20 F.3d 866, 870 (8th Cir. 1994), cert. denied, 513 U.S. 949 (1994). A defendant cannot deliberately avoid knowledge of the conspiracy, also known as “willful blindness,” to escape liability for the conspiracy.²³⁷United States v. Richardson, 14 F.3d 666, 671–72 (1st Cir. 1994); United States v. Faulkner, 17 F.3d 745, 766–68 (5th Cir. 1993), cert. denied, 513 U.S. 870 (1994).

The overt act in furtherance of the conspiracy need be committed by only one of the conspirators, and the act itself need not be illegal.²³⁸Yates v. United States, 354 U.S. 298 (1957). The government need only prove at least one overt act in furtherance of the conspiracy was knowingly committed by one of the conspirators.²³⁹Braverman v. United States, 317 U.S. 49, 53 (1942); United States v. Adamo, 534 F.2d 31 (3d Cir. 1976); United States v. Sacco, 436 F.2d 780 (2d Cir. 1971), cert. denied, 404 U.S. 834 (1971). However, an agreement to commit the overt act without action itself is not enough for a conspiracy charge.²⁴⁰United States v. Bayer, 331 U.S. 532, 542 (1947); United States v. Tobin, 480 F.3d 53, 58 (1st Cir. 2007); United States v. Weidner, 437 F.3d 1023, 1033 (10th Cir. 2006); Woodring v. United States, 376 F.2d 619, 621 (10th Cir. 1967), cert. denied, 389 U.S. 885 (1967). Additionally, the overt act itself does not have to be a criminal act.²⁴¹Yates v. United States, 354 U.S. 298, 334 (1957). See United States v. Soy, 454 F.3d 766, 768 (7th Cir. 2006); United States v. Buckner, 610 F.2d 570, 573 (9th Cir. 1979), cert. denied, 445 U.S. 961 (1980); United States v. Walls, 577 F. Supp. 772, 773 (N.D. Ga. 1984). A defendant may be held liable for acts committed by co-conspirators both prior to, as well as during the defendant’s participation in the conspiracy.²⁴²See United States v. O’Campo, 973 F.2d 1015, 1021–22 (1st Cir. 1992); United States v. Adamo, 882 F.2d 1218, 1230 (7th Cir. 1989). However, a defendant cannot be found criminally liable for substantive crimes that other co-conspirators committed before the defendant joined the conspiracy or after the defendant ended participation in the conspiracy.²⁴³United States v. Lothian, 976 F.2d 1257, 1262 (9th Cir. 1992); United States v. Richardson, 939 F.2d 135, 141 (4th Cir. 1991). The overt act required to sustain a conspiracy charge may consist of the preparation for signing a return, the filing of a return, the making of a false return, or any other means adopted by the conspirators to defraud the government. It is not necessary, however, to show that the government suffered any monetary loss as a result of the conspiracy.²⁴⁴United States v. Tuohey, 867 F.2d 534 (9th Cir. 1989). See United States v. Klein, 247 F.2d 908 (2d Cir. 1957), cert. denied, 355 U.S. 924 (1958), where the court upheld a charge of conspiracy to defraud the United States based on the fact that, although no monetary fraud was committed, there was sufficient evidence of a conspiracy to impair and impede the functioning of the IRS. See also United States v. Buckner, 610 F.2d 570, 573 (9th Cir. 1979), cert. denied, 445 U.S. 961 (1980). Compare United States v. Tarnopol, 561 F.2d 466, 474–75 (3d Cir. 1977), where the Third Circuit limited the holding by refusing to find that a conspiracy to keep false records violated 18 U.S.C. §371 absent evidence that the falsity was carried into the defendant’s tax returns.

In a tax conspiracy, it must be shown that each defendant not only was aware of the tax consequences of his actions, but also had the specific intent to violate the tax laws.²⁴⁵Ingram v. United States, 360 U.S. 672 (1959); United States v. Cyprian, 23 F.3d 1189, 1201 (7th Cir. 1994), cert. denied, 513 U.S. 879 (1994); United States v. Pritchett, 908 F.2d 816 (11th Cir. 1990).

In United States v. Caldwell,²⁴⁶989 F.2d 1056 (9th Cir. 1993). the Ninth Circuit reversed the conviction of a defendant who worked as a bookkeeper at a barter exchange that enabled taxpayers to transact business anonymously since the IRS failed to show deceit as an element of the offense of defrauding the government. The court rejected the government’s argument that under 18 U.S.C. §371, any conspiracy to obstruct a government function is illegal even if the obstruction is done without deceit.

Venue is proper in any judicial district where the agreement was made or where an overt act in furtherance of the conspiracy was committed.²⁴⁷18 U.S.C. §371. See United States v. Smith, 692 F.2d 693 (10th Cir. 1982); United States v. Craig, 573 F.2d 513 (7th Cir. 1978), cert. denied sub. nom., Markert v. United States, 439 U.S. 820 (1978). Each conspirator may face a fine, or imprisonment for up to five years, or both (except that if the object of the conspiracy is a misdemeanor, the punishment for the conspiracy cannot exceed that for the misdemeanor itself). The maximum fines generally are the same as for §7201, discussed above.

Comment: Prosecuting a tax case as a conspiracy under 18 U.S.C. §371 can have advantages to the Government by expanding the scope of relevant proof and creating greater jury appeal. A conviction under the conspiracy statute also has advantages to the Government under the restitution statutes. For a further discussion of restitution, see VI., below.

Although tax-related conspiracies have been prosecuted both as conspiracies to commit an offense against the United States and as conspiracies to defraud the United States, the government has often chosen to prosecute large corporations under the conspiracy to defraud provision.²⁴⁸See, e.g., United States v. Rosenblatt, 554 F.2d 36 (2d Cir. 1977); United States v. Minn. Mining and Mfg. Co., 551 F.2d 1106 (8th Cir. 1977). While it is clear that a corporation may be convicted of conspiracy,²⁴⁹See United States v. Sherpix, Inc., 512 F.2d 1361, 1367 (D.C. Cir. 1975). such liability has usually been limited to conspiracies between the corporation and unrelated individuals or corporations as opposed to conspiracies between a corporation and its own agents.²⁵⁰In United States v. Ingredient Tech. Corp., 698 F.2d 88 (2d Cir. 1983), cert. denied, 462 U.S. 1131 (1983), it appears that an unrelated party was a co-conspirator even though only the taxpayer corporation and its president were indicted and convicted on two counts of conspiracy under 18 U.S.C. §371. The offense consisted of entering into sham purchase transactions in order to inflate the cost of goods sold. A footnote reveals that another party to the transaction, also a corporation, “pleaded guilty to two counts of assisting [the corporate taxpayer] in the presentation of false return information (Section 7206(2)).” 698 F.2d at 90. One can surmise that the other corporation was a party to the conspiracy but was not indicted in return for its plea of guilty on the §7206(2) charges. This is because corporate criminal liability is based on the fiction of corporate personification.²⁵¹United States v. Hartley, 678 F.2d 961, 970 (11th Cir. 1982). Since a conspiracy requires an agreement between two or more persons,²⁵²United States v. Falcone, 311 U.S. 205, 210 (1940). it would seem impossible to allege a conspiracy between a corporation and its agents.²⁵³An individual cannot conspire with himself. Morrison v. Cal., 291 U.S. 82 (1934); United States v. Truslow, 530 F.2d 257, 263 (4th Cir. 1975); United States v. Chase, 372 F.2d 453, 459 (4th Cir. 1967), cert. denied, 387 U.S. 907 (1967). Consistent with this conclusion, it has been held that, where a corporation is solely owned by an individual, a conspiracy cannot exist between that individual and his corporation.²⁵⁴United States v. Carroll, 144 F. Supp. 939, 941–42 (S.D.N.Y. 1956), aff’d, 248 F.2d 134 (2d Cir. 1957), cert. denied, 354 U.S. 394 (1957). See also United States v. Stevens, 909 F.2d 431, 432–33 (11th Cir. 1990). Further, there is a considerable body of law, arising primarily under the Sherman Act, holding that a charge of conspiracy between a corporation and its agents cannot be maintained.²⁵⁵See, e.g., Morton Bldgs. of Neb., Inc. v. Morton Bldgs., Inc., 531 F.2d 910, 917 (8th Cir. 1976); Poller v. CBS, 284 F.2d 599, 603 (D.C. Cir. 1960), rev’d on other grounds, 368 U.S. 464 (1962); Goldlawr, Inc. v. Shubert, 276 F.2d 614, 617 (3d Cir. 1960); Ray v. United Family Life Ins. Co., Inc., 430 F. Supp. 1353, 1358 (W.D.N.C. 1977); Cape Cod Food Products, Inc. v. Nat’l Cranberry Ass’n, 119 F. Supp. 900, 909 (D. Mass. 1954). However, courts have sustained §371 convictions where the corporation conspired with its own officer, agents, employees,²⁵⁶United States v. Hughes Aircraft Co., 20 F.3d 974, 979 (9th Cir. 1994); United States v. Peters, 732 F.2d 1004, 1008 (1st Cir. 1984); United States v. S & Vee Cartage Co., 704 F.2d 914, 920 (6th Cir. 1983). In United States v. Consolidation Coal Co., 424 F. Supp. 577, 581 (S.D. Ohio 1976), rev’d and rem’d on other grounds, 560 F.2d 214 (6th Cir. 1977), the court, in a case dealing with a violation of the Federal Coal Mine Health and Safety Act, explained its finding that a corporation itself may be charged with conspiring with its own corporate personnel: Obviously, a corporation is within the statutory language of “person” and can operate only through its agents. However, employment alone by a corporation does not so merge the employee’s mind and being with that of the corporation so that one person’s cognition remains rather than more than one. When separate individual judgments and decisions are capable of being made by both a corporation and one or more of its employees . . . a corporation can be charged with conspiring with its corporate personnel. subsidiaries²⁵⁷Perma Life Mufflers, Inc. v. Int’l Parts Co., 392 U.S. 134, 141–42 (1968); Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211, 215 (1951), reh’g denied, 340 U.S. 939 (1951); United States v. Yellow Cab Co., 332 U.S. 218, 227 (1947). and related corporations.²⁵⁸Fin. Co. of Am. v. Bank Am. Corp., 493 F. Supp. 895 (D. Md. 1980).

As Justice Harlan noted in his concurrence in United States v. Wise,²⁵⁹370 U.S. 405, 417 (1962) as noted in United States v. Hartley, 678 F.2d 961, 971–72 (11th Cir. 1982). “[T]he fiction of corporate entity, operative to protect officers from contract liability, had never been applied as a shield against criminal prosecutions. . . .”

Comment: The general limitation period for prosecutions under the federal criminal code is five years, “except as otherwise expressly provided by law.”²⁶⁰18 U.S.C. §3282. Though some courts have applied the five-year statute in tax conspiracy cases,²⁶¹Grunewald v. United States, 353 U.S. 391 (1957); United States v. Klein, 247 F.2d 908, 919 (2d Cir. 1957); United States v. Ely, 140 F.3d 1089 (5th Cir. 1998). §6531(8) provides a six-year limitation period for a conspiracy under 18 U.S.C. §371 to evade or defeat any tax. Clearly, this six-year period should apply to any tax conspiracy charge.²⁶²See United States v. Ingredient Tech. Corp., 698 F.2d 88, 98–99 (2d Cir. 1983), cert. denied, 462 U.S. 1131 (1983); United States v. Lowder, 492 F.2d 953, 956 (4th Cir. 1974), cert. denied, 419 U.S. 1092 (1974).

The statute of limitations does not begin to run until the entirety of the illegal conduct is completed,²⁶³United States v. Feldman, 731 F. Supp. 1189 (S.D.N.Y. 1990). and prosecution is timely as to any conspirator who had not withdrawn from the conspiracy before the commencement of the limitations period.²⁶⁴United States v. Witt, 215 F.2d 580 (2d Cir. 1954). To withdraw from the conspiracy, a conspirator must not only cease participation in the conspiracy, but also commit affirmative acts to defeat the objectives of the conspiracy and make reasonable efforts to communicate those acts to co-conspirators or disclose the conspiracy to law enforcement authorities.²⁶⁵United States v. U.S. Gypsum Co., 438 U.S. 422, 463–65 (1978); Pinkerton v. United States, 328 U.S. 640, 645–47 (1946); United States v. Greenfield, 44 F.3d 1141, 1150 (2d Cir. 1995); United States v. Butler, 41 F.3d 1435, 1446 (11th Cir. 1995), cert. denied, 514 U.S. 1121 (1995). The burden of proof is on the defendant to prove he withdrew from the conspiracy.²⁶⁶United States v. Chambers, 944 F.2d 1253, 1265 (6th Cir. 1991); United States v. Roper, 874 F.2d 782, 787 (11th Cir. 1989); United States v. Bradsby, 628 F.2d 901, 905 (5th Cir. 1980).

Comment: Use of the conspiracy statute in the tax area greatly broadens the reach of prosecutors. For example, although a conspiracy might stretch over 20 years, a case will be deemed timely when at least one “overt act” in furtherance of the conspiracy was alleged to have occurred within the six-year statutory limitations period. Practitioners should also be aware of “Klein” conspiracies. Klein conspiracies are conspiracies to impede the lawful functions of the IRS by lying to or misleading its investigators, whether or not a substantive tax crime under the Code is charged or proved. The leading case on this type of conspiracy to defraud the government remains United States v. Klein.²⁶⁷247 F.2d 908 (2d Cir. 1957), cert. denied, 355 U.S. 924 (1958). See United States v. Coplan, 703 F.3d 46 (2d Cir. 2012) (Second Circuit applies four elements to Klein conspiracies); United States v. Fletcher, 322 F.3d 508 (8th Cir. 2003) (Eighth Circuit applies two elements to Klein conspiracies); United States v. Shoup, 608 F.2d 950 (3d Cir. 1979) (Third Circuit applies three elements to Klein conspiracies). See also United States v. Flynn, 969 F.3d 873 (8th Cir. 2020) (declining to extend Marinello v. United States, 138 S. Ct. 1101 (2018), to Klein conspiracies); United States v. Herman, 997 F.3d 251 (5th Cir. 2021) (same). See, e.g., United States v. Gleason, 766 F.2d 1239 (8th Cir. 1985) (upholding conviction of return preparer for Klein conspiracy to defraud government and hinder investigation, as well as for separate §7206(2) charges). In Klein, the defendants’ conspiracy convictions, for unlawfully hampering the Treasury’s investigation of their taxes, were upheld even though the separate charges of tax evasion were dismissed at trial. Thus, the government may charge and convict a tax defendant under the conspiracy statute alone.

A tax conspiracy to impede the IRS cannot, however, be inferred strictly from efforts to conceal illegally obtained income.²⁶⁸United States v. Adkinson, 135 F.3d 1363 (11th Cir. 1998) (Adkinson I); United States v. Adkinson, 158 F.3d 1147 (11th Cir. 1998) (Adkinson II). Absent substantial evidence of both an agreement and intent to impede the IRS, a conspiracy to conceal the source of illegally obtained money is not automatically a Klein conspiracy, even if it collaterally impedes the IRS in the collection of taxes.²⁶⁹See United States v. Vogt, 910 F.2d 1184 (4th Cir. 1990). See also CCA 199906029 (outside of the First Circuit, the government must be able to establish independent evidence of the defendant’s intention to impede IRS in its lawful collection of revenue and may not rely on the mere filing of false income tax returns, where the main goal of the defendant is to conceal illegally obtained income).

The conspiracy statute, along with the §7206(2) charge of aiding and assisting in the preparation of false returns, is among the government’s most-used tools in prosecuting attorneys, accountants, and other tax advisors who may have been involved in the activities of a targeted taxpayer.²⁷⁰See, e.g., United States v. Enstam, 622 F.2d 857 (5th Cir. 1980) (conviction of attorneys for conspiring to impede IRS functions).

2.   

False Statements — 18 U.S.C. §1001

Section 1001 of Title 18 makes it a crime to knowingly and willfully make false statements or to make or use any false documents in any manner within the jurisdiction of any department or agency of the United States. The five elements that the government must prove in a prosecution under 18 U.S.C. §1001 are: (1) the defendant made a statement; (2) the statement was false, fictitious or fraudulent; (3) the statement was made knowingly and willfully; (4) the statement was within the jurisdiction of the federal agency; and (5) the statement was material.²⁷¹See United States v. Shah, 44 F.3d 285, 289 (5th Cir. 1995); United States v. Avelino, 967 F.2d 815, 817 (2d Cir. 1992); United States v. Carrier, 654 F.2d 559 (9th Cir. 1981). See also United States v. Hildebrandt, 961 F.2d 116 (8th Cir. 1992) (district court not required to give “good-faith” defense instruction in prosecution for filing false forms used to report nonwage compensation). There is no requirement that the government suffer any pecuniary or property loss as a result of the false or fraudulent statements or representations.²⁷²United States v. Gilliland, 312 U.S. 86, 93 (1941); United States v. Fern, 696 F.2d 1269 (11th Cir. 1983); United States v. Lichenstein, 610 F.2d 1272, 1278 (5th Cir. 1980), cert. denied, 447 U.S. 907 (1980); Morgan v. United States, 301 F.2d 272, 275 (9th Cir. 1962).

18 U.S.C. §1001 encompasses all statements, whether oral or written, sworn or unsworn, voluntary or required by law,²⁷³See United States v. Beacon Brass Co., 344 U.S. 43, 46 (1952); United States v. Fitzgibbon, 619 F.2d 874, 878 (10th Cir. 1980). and extends to affirmative acts of concealment even where no actual statement was made.²⁷⁴See United States v. Shannon, 836 F.2d 1125, 1129–30 (8th Cir. 1988); United States v. Swaim, 757 F.2d 1530, 1536 (5th Cir. 1985). See also United States v. Goldberger & Dubin, P.C., 935 F.2d 501, 503 (2d Cir. 1991) (upheld §1001 conviction of attorneys who failed to identify clients paying over $10,000 in cash). The government need not prove that the fraud was perpetrated directly on or against the government agency involved.²⁷⁵United States v. Wright, 988 F.2d 1036, 1038 (10th Cir. 1993); United States v. Suggs, 755 F.2d 1538 (11th Cir. 1985). The government, moreover, does not have to establish that the defendant was aware that the false statement was within the jurisdiction of a United States agency or department; only that the defendant knew about the falsity of the statement.²⁷⁶United States v. Yermian, 468 U.S. 63, 69 (1984); United States v. Arcadipane, 41 F.3d 1, 5 (1st Cir. 1994); United States v. Heuer, 4 F.3d 723, 734 (9th Cir. 1993).

Because the statute cannot realistically be read to deal with the multitude of possible deceptive practices that might be perpetrated upon the wide variety of government agencies, the courts have read into the statute a requirement that the government prove that the false statement was material.²⁷⁷United States v. Gaudin, 515 U.S. 506, 522 (1995) (Rehnquist, C.J., concurring); United States v. Ali, 1475 (2d Cir. 1995); United States v. Oren, 893 F.2d 1057, 1063 (9th Cir. 1990); United States v. Lichenstein, 610 F.2d 1272 (5th Cir. 1980), cert. denied, 447 U.S. 907 (1980); United States v. Valdez, 594 F.2d 725, 728 (9th Cir. 1979); United States v. Beer, 518 F.2d 168, 170–172 (5th Cir. 1975); United States v. East, 416 F.2d 351, 353 (9th Cir. 1969).

Materiality is said to depend on whether the falsification is calculated to induce action or reliance by an agency of the United States, whether it is one that would affect or influence the exercise of government functions, and whether it has a natural tendency to influence or is capable of influencing an agency decision.²⁷⁸Kungys v. United States, 485 U.S. 759, 770 (1988); United States v. Ross, 77 F.3d 1525, 1545 (7th Cir. 1996); United States v. Calhoon, 97 F.3d 518, 530 (11th Cir. 1996); United States v. Deep, 497 F.2d 1316, 1321 (9th Cir. 1977) (en banc). In United States v. Meuli, 8 F.3d 1481, 1485 (10th Cir. 1993), the false statements made on tax forms were deemed material because they were capable of influencing IRS action. Because the test may be whether the statement was capable of affecting or influencing the exercise of a government function, the fact that the government is not actually influenced by the statement is immaterial and, therefore, no proof of actual reliance is required.²⁷⁹See United States v. Trent, 949 F.2d 998, 999 (8th Cir. 1991); United States v. Lawson, 809 F.2d 1514, 1520 (11th Cir. 1987); United States v. Lichenstein, 610 F.2d 1272 (5th Cir. 1980), cert. denied, 447 U.S. 907 (1980); United States v. Talkington, 589 F.2d 415, 417 (9th Cir. 1978).

Prior to the Supreme Court’s decision in United States v. Gaudin,²⁸⁰515 U.S. 506 (1995). most circuit courts had considered the determination of materiality to be a question of law for the court. In Gaudin, the Court found that since materiality was an element of the offense, it was a mixed question of law and fact to be determined by the jury and to be proven beyond a reasonable doubt.²⁸¹United States v. Gaudin, 515 U.S. at 512–14.

Comment: Because the Gaudin decision could be applied retroactively to all cases on direct review,²⁸²See generally Griffith v. Kentucky, 479 U.S. 314, 328 (1987). in those prosecutions under 18 U.S.C. §1001 still on direct review in which the government had submitted the element of materiality directly to the court and not to the jury, defendants routinely appealed to reverse their 18 U.S.C. §1001 convictions.²⁸³See, e.g., United States v. McGuire, 79 F.3d 1396, 1398 (5th Cir. 1996); United States v. DiRicio, 78 F.3d 732, 734 (1st Cir. 1996). For the most part, however, these defendants failed to object at the district court level to submitting the materiality issue to the court; thus, the appellate courts looked to see whether the failure to submit the materiality element to the jury constituted “plain error” under Rule 52(b) of the Federal Rules of Criminal Procedure.

Under the test set forth in United States v. Olano,²⁸⁴507 U.S. 725, 732 (1993). before an appellate court can correct an error not raised at trial, there must be: (1) “error,” (2) that is “plain,” and (3) that “affects substantial rights.” If all three conditions exist, an appellate court can then exercise its discretion to notice a forfeited error, but only if the error “seriously affects the fairness, integrity, or public reputation of judicial proceedings.²⁸⁵507 U.S. at 732; United States v. Young, 470 U.S. 1, 15 (1985); United States v. Atkinson, 297 U.S. 157, 160 (1936).

Even though most defendants will be able to satisfy the first three elements — that submitting the materiality element to the jury was error under Gaudin, was plain at the time of appellate consideration, and affected substantial rights — these defendants will most likely not prevail in establishing the fourth requirement of showing that the error seriously affected the fairness, integrity, or public reputation of the proceedings, where the evidence of materiality was “overwhelming.” In Johnson v. United States,²⁸⁶520 U.S. 461 (1997). the Supreme Court ruled that where materiality was essentially uncontroverted, there was no basis for concluding that the error of submitting the determination of materiality to the court “seriously affected the fairness, integrity or public reputation of the judicial proceedings.”

Where the taxpayer has filed a false return but no tax deficiency results, 18 U.S.C. §1001 often has been used by the government as an alternative to §7206(1). Because 18 U.S.C. §1001 does not require that the false statement be made under oath, the provision may also be used against taxpayers who submit false information to Internal Revenue Agents and Revenue Officers in the course of their tax investigations.²⁸⁷See United States v. Fern, 696 F.2d 1269 (11th Cir. 1983). Statements made to IRS Agents conducting a tax investigation/audit constitute a “matter within the jurisdiction” of a U.S. agency under the statute.²⁸⁸See United States v. Rodgers, 466 U.S. 475 (1984) (statements to FBI and Secret Service in the course of their investigations of suspected crimes are covered by 18 U.S.C. §1001). Thus, a prosecution under 18 U.S.C. §1001 may result where a taxpayer willfully makes a false written or oral statement to an IRS Agent in an effort to justify a position he has taken on his tax return.²⁸⁹See, e.g., Smith v. United States, 257 F.2d 133 (10th Cir. 1958); United States v. Silver, 235 F.2d 375 (2d Cir. 1956), cert. denied, 352 U.S. 880 (1956). Statements made by the taxpayer’s attorney during an IRS investigation also may fall within the ambit of 18 U.S.C. §1001.²⁹⁰Peterson v. United States, 344 F.2d 419 (5th Cir. 1965).

One defense that had been asserted to an 18 U.S.C. §1001 prosecution relied on the “exculpatory no” doctrine. The “exculpatory no” doctrine provided, in essence, that “under certain circumstances, the government may not prosecute an individual for false or fraudulent statements which are made in response to questioning initiated by the government where a truthful statement would have incriminated the defendant.”²⁹¹United States v. Steele, 896 F.2d 998, 1001 (6th Cir. 1990), vacated, 933 F.2d 1313, 1315 (6th Cir. 1991) (en banc) (court chose not to apply “exculpatory no”); United States v. Cogdell, 844 F.2d 179, 183 (4th Cir. 1988); United States v. Medina De Perez, 799 F.2d 540 (9th Cir. 1986); United States v. Tabor, 788 F.2d 714, 717–19 (11th Cir. 1986).

Before the Supreme Court’s decision in Brogan v. United States,²⁹²522 U.S. 398 (1998). circuit courts were divided as to the viability of an “exculpatory no” defense to prosecutions under 18 U.S.C. §1001. For example, the First, Fourth, Seventh, Eighth, Ninth, Tenth, and Eleventh Circuits generally recognized the “exculpatory no” doctrine,²⁹³See, e.g., Moser v. United States, 18 F.3d 469, 473–74 (7th Cir. 1994); United States v. Taylor, 907 F.2d 801, 805 (8th Cir. 1990); United States v. Cogdell, 844 F.2d 179, 183 (4th Cir. 1988); United States v. Equihua-Juarez, 851 F.2d 1222, 1224 (9th Cir. 1988); United States v. Tabor, 788 F.2d 714, 717–19 (11th Cir. 1986); United States v. Fitzgibbon, 619 F.2d 874, 880–81 (10th Cir. 1980); United States v. Chevoor, 526 F.2d 178, 183–84 (1st Cir. 1975), cert. denied, 425 U.S. 935 (1976). while the Second and Fifth Circuits categorically rejected the doctrine.²⁹⁴See, e.g., United States v. Brogan, 96 F.3d 35, 37 (2d Cir. 1996), aff’d, 522 U.S. 398 (1998); United States v. Rodriguez-Rios, 14 F.3d 1040 (5th Cir. 1994) (en banc).

In Brogan, the Supreme Court flatly rejected the “exculpatory no” doctrine. In that case, IRS and Department of Labor federal agents asked the defendant whether he had received any cash or gifts from a real estate company when he was a union officer. The defendant responded no, when, in fact, he had received such cash payments. The defendant was subsequently prosecuted under 18 U.S.C. §1001 for making a false statement to a federal agency. In dismissing the defendant’s argument that the simple denial of guilt did not come within the ambit of 18 U.S.C. §1001, the Court ruled that 18 U.S.C. §1001 covers “any” false statement, that “no” was a statement, and that neither the text nor the spirit of the Fifth Amendment conferred upon the defendant a privilege to lie to the federal investigators.²⁹⁵United States v. Brogan, 522 U.S. 398, 399–408 (1998).

Comment: In tax prosecutions, it is still too early to predict whether the danger of the “overzealous prosecutor” using the denial of wrongdoing as a means of “piling on” offenses will come to bear.²⁹⁶See generally Brogan, 522 U.S. at 405 (Court comments that Congress, not courts, must deal with potential overzealous prosecutors since Congress “decreed the obstruction of a legitimate investigation to be a separate offense, and a serious one.”). Nevertheless, the government is empowered following Brogan to criminally charge false statements made by taxpayers, tax preparers or tax professionals to the IRS during an investigation. Arguably, any false statement, whether incriminating or not, may be charged under 18 U.S.C. §1001.

In a prosecution brought under 18 U.S.C. §1001, venue is proper in any judicial district where any overt acts in furtherance of the crime occurred, or where the false statement was filed or presented.²⁹⁷United States v. Mendel, 746 F.2d 155 (2d Cir. 1984), cert. denied, 469 U.S. 1213 (1985); United States v. Wuagneux, 683 F.2d 1343 (11th Cir. 1982), cert. denied, 464 U.S. 814 (1983). The law provides for up to five years’ imprisonment, a fine, or both. The maximum fines generally are the same as for §7201, discussed above. The statute of limitations period is five years under 18 U.S.C. §3282.

3.   

False, Fictitious, or Fraudulent Claims — 18 U.S.C. §287

In addition to charging a defendant with violations of Title 26 for making a false claim for a tax refund, the government may charge the defendant under the felony provisions of 18 U.S.C. §287.²⁹⁸See, e.g., United States v. Stone, 9 F.3d 934, 935 (11th Cir. 1993), cert. denied, 513 U.S. 833 (1994); United States v. Scott, 975 F.2d 927, 928 (1st Cir. 1992); United States v. Parsons, 967 F.2d 452, 456 (10th Cir. 1992); United States v. Causey, 835 F.2d 1289, 1290 (9th Cir. 1987). The elements of the offense are:²⁹⁹United States v. Upton, 91 F.3d 677, 681 (5th Cir. 1996), cert. denied sub nom. Barrick v. United States, 520 U.S. 1228 (1997); United States v. Abbott Washroom Sys., Inc., 49 F.3d 619, 624 (10th Cir. 1995); United States v. Ewing, 957 F.2d 115, 119 (4th Cir. 1992). (1) the defendant presented a claim against the United States or any agency or department of the United States; (2) the claim was false, fictitious or fraudulent; and (3) the defendant knew the claim was false, fictitious, and fraudulent at the time he or she submitted it.³⁰⁰See United States v. Knockum, 738 F. App’x 574 (9th Cir. 2018) (unpub. op.) (conviction on two false claim counts permitted where same claim was presented on two separate occasions within same year; intent to collect separately on each claim was not required and thus counts were not multiplicitous).

Note: In CCA 201545016, the Chief Counsel’s Office concluded that a guilty plea to a 18 U.S.C. §287 false claims charge does not collaterally estop a taxpayer from litigating either a §6663 fraud penalty or a §6651(f) fraudulent failure to file addition to tax. The intent to evade tax is not an element of the false claims statute, and thus is not substantially determined by that adjudication.

There is a split in the circuit courts as to whether materiality is an element the government has to prove to establish a violation of 18 U.S.C. §287. The Eighth and Fourth Circuits have held that materiality is an essential element of a 18 U.S.C. §287 charge while the Second, Fifth, Ninth, and Tenth Circuits have found that materiality is not a required element of the offense.³⁰¹Compare United States v. Pruitt, 702 F.2d 152, 155 (8th Cir. 1983) (materiality is essential element); United States v. Snider, 502 F.2d 645, 652 n.12 (4th Cir. 1974); (same) with United States v. Upton, 91 F.3d 677, 684–85 (5th Cir. 1996), cert. denied sub nom. Barrick v. United States, 520 U.S. 1228 (1997) (materiality is not essential element); United States v. Taylor, 66 F.3d 254, 255 (9th Cir. 1995) (same), cert. denied, 117 S. Ct. 1105 (1997); United States v. Parsons, 967 F.2d 452, 455 (10th Cir. 1992) (same); United States v. Elkin, 731 F.2d 1005, 1009–10 (2d Cir. 1984) (same). While the Supreme Court has not resolved this inter-circuit dispute, recent holdings tend to show that the Court will find materiality not to be an element of a 18 U.S.C. §287 violation. In United States v. Wells,³⁰²519 U.S. 482 (1997). the Court ruled that materiality was not an element of a violation of 18 U.S.C. §1014, submission of a false statement in a loan application to a federally insured financial institution. The Court found, inter alia, that the statutory text did not mention materiality, that the common law definition of false statement did not include a materiality component, and that the statutory history confirmed the natural reading of the section without a materiality element.³⁰³519 U.S. at 489–97. 18 U.S.C. §287, like 18 U.S.C. §1014, fits within these same criteria and thus the Wells decision militates in favor of the Court finding materiality not to be an element of an 18 U.S.C. §287 offense. If, however, materiality is found to be an element of the offense, then, under Gaudin, that element should be submitted to the jury.³⁰⁴United States v. Gaudin, 515 U.S. 506, 511–17 (1997). Nevertheless, the harmless error rule applies if the trial court refuses to submit the materiality issue to the jury, according to the Supreme Court in Neder v. United States.³⁰⁵527 U.S. 1 (1999), aff’g in part and rev’g in part 136 F.3d 1459 (11th Cir. 1998); United States v. Foster, 229 F.3d 1196 (5th Cir. 2010).

Because 18 U.S.C. §287 requires the making of a false claim against the government, it has been applied to the filing or causing the filing of false or fraudulent claims for tax refunds rather than the mere filing of a false return.³⁰⁶United States v. Murph, 707 F.2d 895 (6th Cir. 1983) (defendant who “sold” to “tax return discounter” return purporting to be that of defendant (but executed under fictitious name) showing overpayment of tax, “caused” fictitious return to be filed within meaning of statute). The presentation of an income tax refund check for payment has also been held to constitute a “false claim” against the United States within this section.³⁰⁷United States v. Branker, 395 F.2d 881, 889 (2d Cir. 1968), cert. denied, sub nom. Lacey v. United States, 393 U.S. 1029 (1968).

For defendant tax preparers, it is irrelevant whether a taxpayer actually knew that the tax returns prepared by the tax preparer were false, where the tax preparer knew that his advice violated the tax laws.³⁰⁸United States v. Causey, 835 F.2d 1289, 1291 (9th Cir. 1987).

Upon conviction of this crime, the defendant may be imprisoned for up to five years. The current maximum fines are generally the same as for §7201, discussed above, except that for false claims made to the U.S. Department of Defense on or after November 8, 1985, the maximum fine is $1,000,000.³⁰⁹Pub. L. No. 99-145, Title IX, §931, Nov. 8, 1985. Note that pursuant to the U.S. Sentencing Guidelines, a finding of intent to cause a loss is necessary to establish intended loss for the purpose of calculating the loss amount for sentencing.³¹⁰See United States v. Tulaner, 512 F.3d 576 (9th Cir. 2008); U.S.S.G. §2B1.1. See also United States v. Knockum, 738 F. App’x 574 (9th Cir. 2018) (unpub. op.) (case remanded to determine whether defendant filed duplicate claims with inte nt to recover twice and if not to reduce his sentence accordingly). It should also be noted that a special provision, 18 U.S.C. §286, prohibits conspiracies to file false claims against the United States. While essentially identical to 18 U.S.C. §371 in other respects,³¹¹See I.B.1., above. the penalties under 18 U.S.C. §286 are more severe.³¹²The maximum punishment for a violation of 18 U.S.C. §286 is ten years imprisonment as opposed to five years under 18 U.S.C. §371.

4.   

Money Laundering — 18 U.S.C. §1956 and §1957

Prosecutors at times have sought to include money laundering charges in indictments charging tax and other fraud violations. Under the Sentencing Guidelines, discussed below, the guideline ranges for money laundering charges are greater than for the underlying fraudulent conduct. At the same time, the evidence needed to prove money laundering violations is often just marginally greater than that needed to establish the fraudulent conduct itself.

The Money Laundering Control Act of 1986³¹³18 U.S.C. §1956, §1957, amended by Antiterrorism and Effective Death Penalty Act of 1996, Pub. L. No. 104-132, §726, (1996) and USA Patriot Act, Pub. L. No. 107-56 (Title III, Subtitle A) (2001). See also 1986 U.S.C.C.A.N. 5393 (legislative history of Money Laundering Control Act of 1986); and 1996 U.S.C.C.A.N. 944 (legislative history of Antiterrorism and Effective Death Penalty Act of 1996). defined and criminalized for the first time a category of activity known as “money laundering.”³¹⁴See Richard G. Strafer, Money Laundering: The Crime of the 90’s, 27 Am. Crim. L. Rev. 149 (1989); Mark R. Irvine & Daniel R. King, Comment, The Money Laundering Control Act of 1986: Tainted Money and the Criminal Defense Lawyer, 19 Pac. L. J. 171, 176–77 (1987); Project, Twelfth Survey of White Collar Crime, 34 Am. Crim. L. Rev. 793–814 (1997). Unlike earlier efforts, like the Bank Secrecy Act and the Currency and Foreign Transactions Reporting Act, that unsuccessfully attempted to control the movement of illegal income through financial institution reporting requirements,³¹⁵See 31 U.S.C. §321, §5311–§5324 (Bank Secrecy Act); 12 U.S.C. §1730(d), §1829(b), §1951–§1959 (Currency and Foreign Transactions Reporting Act). the Money Laundering Control Act was aimed at “the lifeblood of organized crime” — the act of converting funds derived from illegal activities into spendable forms.³¹⁶Letter from Irving R. Kaufman, Chairman, President’s Commission on Organized Crime, to President Ronald Reagan (Oct. 1984), reprinted in President’s Commission on Organized Crime, Interim Report to the President and the Attorney General, The Cash Connection: Organized Crime, Financial Institutions and Money Laundering (1984).

The Money Laundering Control Act consists of two sections: 18 U.S.C. §1956, which addresses the knowing and intentional transaction in, transportation or transfer of monetary funds derived from certain specified unlawful activities; and 18 U.S.C. §1957, which deals with financial transactions over $10,000 from criminally derived property.

18 U.S.C. §1956 prohibits 10 different types of offenses that can be grouped into three categories: “transaction money laundering” where the prohibited action is the financial transaction itself; “transportation money laundering” where monetary instruments are transported in foreign commerce with knowledge that such instruments are associated with unlawful activities; and “sting operations” where the government pretends to conduct financial transactions with the proceeds of specified unlawful activity.³¹⁷See Project, Twelfth Survey of White Collar Crime, 34 Am. Crim. L. Rev. at 795–97.

There are four potential crimes that can fall under the “transaction money laundering” prohibitions of 18 U.S.C. §1956(a)(1). Each of these crimes occurs when an individual conducts or attempts to conduct a financial transaction with criminally derived money. The crimes are: (1) conducting a financial transaction with the intent to promote specified unlawful activity;³¹⁸18 U.S.C. §1956(a)(1)(A)(i). “Specified unlawful activity,” defined in 18 U.S.C. §1956(c)(7), covers a vast array of offenses. It includes, inter alia, all racketeering offenses listed in 18 U.S.C. §1961(1) (e.g., murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, etc. chargeable under state law and punishable by imprisonment for more than a year); bankruptcy fraud (18 U.S.C. §152); financial institution fraud and embezzlement (e.g., 18 U.S.C. §656, §657, §658, §1005, §1006, §1007, §1014, §1344); mail fraud (18 U.S.C. §1341); and wire fraud (18 U.S.C. §1343). The USA Patriot Act, Pub. L. No. 107-56, enacted October 26, 2001, added new crimes that constitute specified unlawful activities, including customs and firearm offenses, computer fraud offenses and U.S. export control violations. (2) conducting a financial transaction with the intent to engage in tax crimes violating §7201 or §7206;³¹⁹18 U.S.C. §1956(a)(1)(A)(ii). This section does not criminalize tax evasion but prohibits conducting financial transactions with the intent to avoid paying taxes. (3) conducting a financial transaction designed to conceal or disguise the nature, location, source, ownership, or control of the proceeds of specified unlawful activity;³²⁰18 U.S.C. §1956(a)(1)(B)(i). The Supreme Court ruled in United States v. Santos, 553 U.S. 507 (2008), that only profits are to be regarded as criminal proceeds subject to money laundering prosecutions. The Court rejected the government’s arguments that receipts or expenses related to an illegal activity can be considered “proceeds” under the statute. and (4) conducting a financial transaction designed to avoid a state or federal reporting requirement.³²¹18 U.S.C. §1956(a)(1)(B)(ii).

Under the “transportation money laundering” violations of 18 U.S.C. §1956(a)(2), three separate offenses are delineated relating to the transportation, transmission, or transfer of criminally derived proceeds. The three crimes consist of the transportation, transmission or transfer of a monetary instrument³²²As defined in 18 U.S.C. §1956(c)(5), the term “monetary instruments” means coin or currency of the U.S. or of any other country, travelers’ checks, personal checks, bank checks, and money orders, or investment securities or negotiable instruments, in bearer form or otherwise in such form that title thereto passes upon delivery. into or out of the United States: (1) with the intent to promote the carrying on of a specified unlawful activity;³²³18 U.S.C. §1956(a)(2)(A). (2) when it is known that the monetary instrument represents the proceeds of some form of unlawful activity, and the transportation is designed to conceal or disguise such proceeds;³²⁴18 U.S.C. §1956(a)(2)(B)(i). In Cuellar v. United States, 553 U.S. 550 (2008), the Supreme Court considered whether this part of the statute requires the government to prove: (1) that the defendant attempted to make illegal funds appear legitimate; or (2) merely that the defendant hid money during transportation. The Court took the middle road between these two options. It ruled that although the government does not need to show that the defendant attempted to make illegal funds look legitimate, it must show that the defendant did more than merely hide the funds during transport. To sustain a conviction, the government must prove that the defendant knew that a purpose of the transportation was to conceal or disguise a listed attribute of the illicit funds. and (3) when it is known that the monetary instrument represents the proceeds of some form of unlawful activity, and the transportation is designed to avoid a state or federal transaction reporting requirement.³²⁵18 U.S.C. §1956(a)(2)(B)(ii).

18 U.S.C. §1956(a)(3) prohibits three activities conducted during government “sting operations.” Under this section, it is illegal to conduct a financial transaction involving property represented by a law enforcement officer to be the proceeds of a specified unlawful activity with the intent: (1) to promote specified unlawful activity;³²⁶18 U.S.C. §1956(a)(3)(A). (2) to conceal or disguise the nature, location, source, ownership or control of the proceeds of specified unlawful activity;³²⁷18 U.S.C. §1956(a)(3)(B). or (3) to avoid a state or federal transaction reporting requirement.³²⁸18 U.S.C. §1956(a)(3)(C).

18 U.S.C. §1957 punishes individuals who knowingly engage or attempt to engage in a monetary transaction³²⁹The definition of “monetary transaction” in 18 U.S.C. §1957, as provided in 18 U.S.C. §1957(f)(1), is less expansive than the definition of “financial transaction” in 18 U.S.C. §1956, as provided in 18 U.S.C. §1956(c)(4). A “monetary transaction” means the deposit, withdrawal, transfer, or exchange, in or affecting interstate or foreign commerce, of funds or a monetary instrument, by, through, or to a financial institution. However, the term does not include any transaction necessary to preserve a person’s right to representation as guaranteed by the Sixth Amendment. Thus, the government cannot use 18 U.S.C. §1957 to criminalize the actions of defendants paying their defense attorneys over $10,000 for legal fees from criminally derived property; however, 18 U.S.C. §1956 has no such limitation. in criminally derived property, which has a value greater than $10,000 and is derived from specified unlawful activity. This section has a far broader sweep than 18 U.S.C. §1956. As long as the transaction is greater than $10,000, 18 U.S.C. §1957, unlike 18 U.S.C. §1956, does not require any intent to promote or conceal the underlying criminal activity.

To prove a violation under the Money Laundering Control Act, the government must establish the following elements beyond a reasonable doubt: (1) knowledge; (2) the existence of a specified unlawful activity; (3) a financial transaction; (4) proceeds and (5) intent.³³⁰18 U.S.C. §1956(a)(1)(A)(i), §1956(a)(1)(A)(ii), §1956(a)(1)(B)(i), and §1956(a)(1)(B)(ii), respectively.

Both 18 U.S.C. §1956 and §1957 require that the property or money in question be, in fact, the proceeds of a specified unlawful activity. 18 U.S.C. §1957 requires that the individual know that property involved in the monetary transaction derives from criminal activity; however, the individual need not know from what specific criminal activity the property was derived, only that it was derived from some form of criminal conduct.³³¹Under 18 U.S.C. §1957(c), the government is not required to prove the defendant knew that the offense from which the criminally derived property was derived was specified unlawful activity. Similarly, 18 U.S.C. §1956 mandates that the individual know that the property involved in the financial transaction represents the proceeds of “some form of unlawful activity,” that is, some form of felonious conduct under state, federal or foreign law, though the individual need not know the specific criminal activity from which the proceeds were derived.³³²18 U.S.C. §1956(c)(1); United States v. Isabel, 945 F.2d 1193, 1201 n.13 (1st Cir. 1991).

The government may prove knowledge by establishing actual knowledge on the part of the defendant or his or her willful blindness to the criminal activity.³³³See United States v. Bader, 956 F.2d 708, 710 (7th Cir. 1992) (knowledge more than “should have known” or “could have concluded”); United States v. Kaufmann, 985 F.2d 884, 895–97 (7th Cir. 1993) (upheld conviction against car dealer for being willfully blind to use of drug proceeds to buy car), cert. denied, 508 U.S. 913 (1993); United States v. Campbell, 977 F.2d 854, 859 (4th Cir. 1992) (upheld conviction against real estate agent for being willfully blind to client’s use of drug proceeds to purchase house).

In addition, the government need not trace the proceeds involved in a money laundering transaction back to a particular offense, if it can show that the defendant engaged in conduct typical of that type of criminal activity and had no other legitimate source for the income.³³⁴See United States v. Jackson, 983 F.2d 757, 766 (7th Cir. 1993). But see United States v. Blackman, 904 F.2d 1250, 1257 (8th Cir. 1990) (government cannot rely exclusively on proof that defendant charged with using proceeds from illegal activity has no legitimate source of income). Moreover, if the illegal proceeds are commingled in a bank account with legitimate income, the government need not segregate the tainted funds from the untainted funds to prosecute the money laundering offense; this avoids allowing money launderers to escape prosecution by commingling legitimate funds with proceeds of the crime.³³⁵See United States v. Marbella, 73 F.3d 1508, 1515–16 (9th Cir. 1996), cert. denied, 518 U.S. 1020 (1996); United States v. Johnson, 971 F.2d 562, 570 (10th Cir. 1992).

In sting operations, the government has been successful in using undercover operatives to ensnare individuals for money laundering violations who have attempted to structure financial transactions to avoid IRS reporting requirements. In United States v. Starke,³³⁶62 F.3d 1374, 1380–84 (11th Cir. 1995). the court upheld the money laundering conviction of a motel/restaurant owner who acquired cashier’s checks for undercover agents, who represented themselves to be drug dealers, and structured transactions to avoid IRS reporting requirements. Similarly, in United States v. Jensen,³³⁷69 F.3d 906 (8th Cir. 1995). the court affirmed the conviction of a car salesman who accepted payment from undercover agents, who represented the payments as being the proceeds of illegal activity, and structured transactions to avoid IRS reporting requirements.

The maximum criminal penalty for a §1956 violation is 20 years imprisonment, a fine of $500,000 or twice the value of the monetary instruments or laundered funds, whichever is greater, or both.³³⁸18 U.S.C. §1956(a)(1)–(3). In addition, there may be a civil penalty of not more than the greater of the value of the property, funds, or monetary instruments involved in the transaction; or $10,000.³³⁹18 U.S.C. §1956(b). The criminal penalties for a 18 U.S.C. §1957 violation include 10 years imprisonment, a fine, or both.³⁴⁰18 U.S.C. §1957(a), §1957(b)(1)–(2).

More significantly, the sentencing guideline ranges under the federal Sentencing Guidelines for money laundering offenses significantly exceed, in many cases, the ranges for the underlying offenses.

Pursuant to Treasury Directive 15-42,³⁴¹Treasury Directive 15-42; IRM 9.1.2.2 (9-6-13). the IRS has authority to investigate all violations of 18 U.S.C. §1956 and §1957 that are discovered in the course of an ongoing Title 26 or Bank Secrecy Act investigation. (The IRS is required to coordinate its investigation with the law enforcement agency which has jurisdiction over the specific unlawful activity.)³⁴²Treasury Directive 15-42; IRM 9.1.2.2 (9-6-13). Thus, the IRS has recently played a larger role in the enforcement of these laws.

In a bluesheet implementing prospective policy concerning the Anti-Drug Abuse Act of 1988, the Department of Justice noted that the amended 18 U.S.C. §1956 “was not intended to provide a substitute for traditional Title 18 and Title 26 charges related to tax evasion, filing of false returns, including the aiding and abetting thereof, or tax fraud conspiracy. Consequently, appropriate tax-related Title 18 and Title 26 charges are to be utilized when the evidence warrants their use.”³⁴³1989 Bluesheet regarding: “Review and Prosecution of 18 U.S.C. §1956(a)(1)(A)(ii) Money Laundering Cases,” issued by the Department of Justice to holders of U.S. Attorneys’ Manual Title 9, affecting U.S.A.M. 9-105.000. In Department of Justice, Tax Division Directive No. 128 (Oct. 29, 2004) superseding Directive No. 99 (Mar. 30, 1993), the Justice Department stated that the authorization of the Tax Division is required before a money laundering charge may be brought where the specified unlawful activity is based on a violation arising under the internal revenue laws.

Comment: In order for money laundering to be charged, the conduct must involve some “specified unlawful activity” as defined in the statute. Tax crimes discussed in the Portfolio are not, under present law, classified as “specified unlawful activities.” Under current law, in order to charge money laundering, there must be some other Title 18 offense associated with the tax conduct, such as mail or wire fraud. In some very limited circumstances, what appears to be a tax crime can be charged as a mail fraud, such as where the mails are used to evade a state tax. In United States v. Yusef,³⁴⁴536 F.3d 178 (3d Cir. 2008), cert. denied (2009). the Third Circuit held that the portion of lawful receipts of a legitimate business that would otherwise have been remitted to the government, but are retained on account of a criminal failure to pay taxes, constitute “profits,” which can be the subject of a money laundering indictment if fraudulent returns have been mailed to the taxing authorities (mail fraud being the underlying specified unlawful activity). The Third Circuit’s decision is at odds with other courts of appeal³⁴⁵United States v. Khanani, 502 F.3d 1281, 1295–1297 (11th Cir. 2007). and has been criticized by leading commentators.³⁴⁶See 2 Ian M. Comisky, Lawrence S. Feld and Steven M. Harris, Tax Fraud and Evasion, ¶11.02 [2][d], at S11-11 (2008 Cum. Supp. No. 2).

Comment: While it appears the Department of Justice is interpreting the Yusef decision narrowly and does not plan to push for an expansive reading which could allow for many more tax-mail fraud prosecutions as money laundering, the Department of Justice has recommended to Congress that, given globalization and the use of offshore banking, Congress should expand the transportation money laundering crime to include tax evasion The Department cautioned that:

. . . [t]ax offenses are not predicates for RICO offenses — a deliberate Congressional decision — and charging a tax offense as a mail fraud charge could be viewed as circumventing Congressional intent unless unique circumstances justifying the use of a mail fraud charge are present.

However, once a decision has been made by the Tax Division to authorize mail fraud charges, the decision whether to authorize a RICO charge in turn based on these mail fraud charges is one for the Criminal Division to make.³⁴⁷1989 Bluesheet, n.336 above, at p. 4. In Department of Justice, Tax Division Directive No. 99,³⁴⁸(Mar. 30, 1993). the Justice Department stated that the authorization of the Tax Division is required before charging mail, wire or bank fraud, either independently or as predicate acts to a RICO charge or as the specified unlawful activity element of a money laundering charge, when the mailing, wiring, or representation charged is used to promote or facilitate any criminal violation arising under the internal revenue laws. The DOJ Tax Division will only grant such authorization in limited circumstances. Generally, approval will not be granted: (1) when the only mailing charged is an internal revenue document or form; (2) when the only wire transmission is a transmission of tax return information to the IRS or the transmission of a refund to a bank account; or (3) when the mailing, wiring, or representation charged is only incidental to a violation arising under the internal revenue laws.

The authorization of the RICO Section of the Criminal Division must also be sought. In addition, traditional tax charges must also be brought.

Under 18 U.S.C. §1963, RICO violators may be fined, imprisoned up to 20 years (or for life if the racketeering activity has a maximum penalty of life imprisonment), and be subjected to mandatory asset forfeiture.

Comment: In light of the restrictions placed on the use of the RICO statute in connection with tax prosecutions, it is not surprising that there have been relatively few such prosecutions in the past. Because the government can achieve nearly the same goals using the less restrictive money laundering statutes as it can using the more regulated RICO statute — that is, obtaining significant sentences and subjecting defendants to asset forfeiture³⁴⁹Under 18 U.S.C. §982, the court shall order that a person convicted under the money laundering statutes forfeit to the U.S. any property, real or personal, involved in the money laundering offense or traceable to such property. — one expects to see the RICO statute continue to be used infrequently in the future where the central crime is a violation of federal tax laws. However, for reasons stated above, in cases where the central crime is a violation of RICO, the addition of substantive tax charges, where applicable, is not uncommon.

5.   

Mail Fraud and Wire Fraud — 18 U.S.C. §1341 & §1343

Section 1341 of Title 18 makes it a crime to use the U.S. Postal Service or any private or commercial interstate carrier to send any matter or thing in furtherance of a scheme or artifice to defraud or obtain money or property by false pretenses.³⁵⁰In 1994, Congress amended 18 U.S.C. §1341 to cover not only the U.S. Postal Service but any private or commercial interstate carriers, like FedEx, DHL, and UPS. See Senior Citizens Against Marketing Scams Act of 1994, Pub. L. No. 103-322, Title XXV, §250006.

Section 1343 of Title 18 makes it a crime to use wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures or sounds to transmit any matter or thing in furtherance of a scheme or artifice to defraud or obtain money or property by false or fraudulent pretenses.

Both offenses are nearly identical except for the mode of delivery in furtherance of the scheme.³⁵¹United States v. Briscoe, 65 F.3d 576, 583 (7th Cir. 1995) (citing United States v. Ames Sintering Co., 927 F.2d 232, 234 (6th Cir. 1990) (per curiam)); United States v. Frey, 42 F.3d 795, 797 (3d. Cir. 1994) (wire fraud is identical to mail fraud statute except that it speaks of communications transmitted by wire.); see also, e.g., United States v. Proffit, 49 F.3d 404, 406 n. 1 (8th Cir. 1995). The basic elements of a prima facie case are (1) the defendant voluntarily and intentionally devised or participated in a scheme to defraud others of money; (2) with the intent to defraud; (3) where it was reasonably foreseeable that interstate mail or wire communications would be used; and (4) that interstate mail or wire communications were in fact used.³⁵²United States v. Proffit, 49 F.3d 404, 406 n. 1 (8th Cir. 1995) cert. denied, 515 U.S. 1127 (1995).

To establish a wire fraud violation, the government must prove that the defendant used wire communications in furtherance of the scheme. While a materially false statement contained in a document sent through the mail or use of wire clearly constitutes a violation of these sections,³⁵³United States v. Reid, 533 F.2d 1255, 1265 (D.C. Cir. 1976). deceitful statements or half-truths or the concealment of material facts may also constitute a fraudulent representation.³⁵⁴United States v. Allen, 554 F.2d 398, 410 (10th Cir. 1977), cert. denied, 434 U.S. 836 (1977); Lustiger v. United States, 386 F.2d 132, 138 (9th Cir. 1967), cert. denied, 390 U.S. 951 (1968). Materiality as an element of the offense of mail or wire fraud must be submitted to the jury; however, the harmless error rule would apply if the trial court refused to submit the materiality issue to the jury.³⁵⁵United States v. Neder, 527 U.S. 1 (1999). In contrast, “puffing” or simply exaggerating the qualities, opportunities or value of an article, does not generally constitute fraudulent intent.³⁵⁶United States v. Gay, 967 F.2d 322, 329 (9th Cir. 1992); United States v. Simon, 839 F.2d 1461, 1468 (11th Cir. 1988). Further, the fact that the mailed or wired items may have contained no misrepresentations will not necessarily preclude a conviction on charges of mail or wire fraud where the mailings or wire communications are made in furtherance of a fraudulent scheme.³⁵⁷Schmuck v. United States, 489 U.S. 705, 715 (1989); Parr v. United States, 363 U.S. 370, 390 (1960); United States v. Nelson, 988 F.2d 798, 804 (8th Cir. 1993). Success of the scheme, or proof that a person or entity was actually defrauded as a result thereof, is also not necessary to sustain a conviction.³⁵⁸United States v. Brown, 79 F.3d 1550, 1557 n. 12 (11th Cir. 1996); United States v. Merklinger, 16 F.3d 670, 678 (6th Cir. 1994).

The Supreme Court in McNally v. United States³⁵⁹483 U.S. 350, 355–57 (1987). noted that any benefit the government derives from the mail fraud or wire fraud statutes must be limited to the government’s interests as a “property holder.” Under McNally, schemes that have the effect of depriving federal, state or local governments of tax revenues they would otherwise receive can be prosecuted under the mail or wire fraud statute.³⁶⁰United States v. Porcelli, 865 F.2d 1352 (2d Cir. 1989); United States v. Regan, 713 F. Supp. 629 (S.D.N.Y. 1989); United States v. Hosty, 694 F. Supp. 523 (N.D. Ill. 1988). Section 1341 of Title 18 has been applied to the mailing of fraudulent state returns,³⁶¹United States v. Porcelli, 865 F.2d 1352 (2d Cir. 1989); United States v. Brewer, 528 F.2d 492 (4th Cir. 1975); United States v. Mirabile, 503 F.2d 1065 (8th Cir. 1974); United States v. Flaxman, 495 F.2d 344 (7th Cir. 1974). as well as to the mailing of fraudulent claims for refunds.³⁶²United States v. Mangan, 575 F.2d 32 (2d Cir. 1978).

In a prosecution brought under 18 U.S.C. §1341, venue is proper in the district where the letter was mailed or in the district where it was delivered.³⁶³United States v. McGregor, 503 F.2d 1167 (8th Cir. 1974). Some courts have stated that venue is proper in any district through which the letter passed. United States v. Cashin, 281 F.2d 669 (2d Cir. 1960), United States v. Duma, 228 F. Supp. 755 (S.D.N.Y. 1964). But see Travis v. United States, 364 U.S. 631 (1961). Unlike mail fraud, 18 U.S.C. §1343 does not reference to venue.³⁶⁴See United States v. Goldberg, 830 F.2d 459, 465 (3d Cir. 1987) (Section 1343 is a continuing offense under 18 U.S.C. §3237 “so that venue is proper in any district in which the offenses were begun, continued, or completed.”). Prosecution may be instituted in any district in which the transmission was issued or terminated.³⁶⁵United States v. Goldberg, 830 F.2d 459, 465 (3d Cir. 1987).

Upon conviction of either of these crimes, a defendant may be imprisoned up to 20 years, fined up to $250,000, or both.³⁶⁶The Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, §903, increased the period of time a defendant may be imprisoned upon conviction of mail fraud from five years to 20 years, effective July 30, 2002. If the violation affects a financial institution or occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency, the defendant may be imprisoned up to 30 years and fined up to $1,000,000.

The statute of limitations for both these crimes is five years.³⁶⁷18 U.S.C. §3282. However, where either offense affects a financial institution, the statute is extended to 10 years.³⁶⁸18 U.S.C. §3293.

The Department of Justice has provided:

Under certain narrowly defined circumstances . . . a mail fraud prosecution predicated on a mailing of an Internal Revenue form or document, or where the scheme involved is essentially a tax fraud scheme, might be appropriate in addition to, but never in lieu of, applicable substantive tax charges. See United States v. Mangan, 575 F.2d 32, 48–49 (2d Cir. 1978) . . . Such a situation could arise in a tax shelter or other tax fraud case, when individuals, through no deliberate fault of their own, were demonstrably victimized as a result of a defendant’s fraudulent scheme and use of a mail fraud charge is necessary to achieve some legitimate, practical purpose like securing restitution for the individual victims. The fact that a defendant committed conduct which independently victimized individuals is to be reflected in the mail fraud allegations in the indictment. Mail fraud charges could also be used in a tax fraud case when the government was also victimized in a non-revenue collecting capacity.³⁶⁹See, e.g., United States v. Busher, 817 F.2d 1409, 1412 (9th Cir. 1987); 1989 Bluesheet, n.298, at p. 3. The Department continued: “Normally, in a tax shelter case, the mere imposition of interest and penalties on the investors will not constitute sufficient victimization to warrant the use of mail fraud charges in addition to tax charges. However, each individual case will be reviewed on its merits to determine whether the degree of culpability of the individual investors is such as to treat them more as victims than participants in the particular scheme. Among the factors to consider are the existence of bona fide pending civil suits against the promoters by the investors, the nature and degree of misrepresentations made to the investors, and the degree of independent losses beyond the tax liability. A similar policy will be followed with respect to the filing of RICO charges predicated on mail fraud charges which in turn involve essentially only a tax fraud scheme. . . .”1989 Bluesheet, n.297, at pp. 3–4.

The authorization of the Tax Division is required before charging mail fraud when the mailing is used to promote or facilitate any criminal violation arising under the internal revenue laws.³⁷⁰Department of Justice, Tax Division Directive No. 128 (Oct. 29, 2004); https://www.justice.gov/archives/usam/tax-resource-manual-14-tax-division-directive-no-128. Additionally, the Tax Division will not approve mail or wire fraud charges in cases involving only one person’s tax liability, unless there are unusual circumstances.³⁷¹Department of Justice, Tax Division Directive No. 128 (Oct. 29, 2004). In other words, the Tax Division will not approve mail or wire fraud charges in lieu of a tax charge.

6.   

Bribery — 18 U.S.C. §201

The government naturally treats the bribery of IRS agents with the utmost seriousness, and generally prosecutes the corrupt agents as well as the individuals offering the bribe. Generally, the person offering the bribe is a taxpayer³⁷²United States v. Caceres, 440 U.S. 741 (1979). or a tax advisor seeking results for a client.³⁷³United States v. Umans, 368 F.2d 725 (2d Cir. 1966). Under 18 U.S.C. §201(b)(1), one is guilty of bribery if he offers or gives “anything of value” to a public official with the “intent”: (1) to influence any official act; (2) to influence the public official to defraud the government; or (3) to induce the public official to violate a legal duty. An official who seeks or accepts anything of value in return for any of the same three acts is also guilty of bribery.³⁷⁴18 U.S.C. §201(b)(2). See United States v. Cruz, 946 F.2d 122, 123 (11th Cir. 1991).

Upon conviction of this crime, the defendant may be imprisoned up to 15 years, or fined up to three times the monetary equivalent of the bribe, or both.³⁷⁵18 U.S.C. §201(b) (flush language).

The anti-gratuity statute³⁷⁶18 U.S.C. §201. does not apply, however, to the United States or an Assistant U.S. Attorney functioning within the official scope of the office.³⁷⁷United States v. Singleton, 165 F.3d 1297 (10th Cir. 1999). See CCA 199911043 (18 U.S.C. §201 does not prevent U.S. Attorneys and their assistants from offering leniency in exchange for testimony; courts have drawn longstanding practice of sanctioning testimony of accomplices against their confederates in exchange for leniency), CCA 199906030 (safeguards established to minimize abuses of well-established practice of plea bargaining make clear that Congress and courts sanction this practice as necessary investigatory and prosecutorial tool).

Comment: IRS bribery cases are investigated by agents of the Treasury Inspector General for Tax Administration (TIGTA). Often, they will seek to corroborate the bribe offer by having the IRS employee use a tape recording device and enticing the taxpayer to reconfirm his initial bribe overture and/or make further bribe offers. The central defense of such taxpayers is normally entrapment, that is, that they were either induced to commit the crime by the IRS employee and/or they were not predisposed to committing the crime prior to their initial contact with the IRS employee.³⁷⁸See Jacobson v. United States, 503 U.S. 540, 548 (1992) (“Government agents may not originate a criminal design, implant in an innocent person’s mind the disposition to commit a criminal act, and then induce commission of the crime so that the Government may prosecute.”). If the taxpayer makes a prima facie case of entrapment, the burden shifts to the government to prove beyond a reasonable doubt that the taxpayer was not entrapped.³⁷⁹Jacobson v. United States, 503 U.S. at 549. Such defenses have met with mixed success, depending in large part on whether the taxpayer was able to show that his or her will was overcome by repeated government inducements.³⁸⁰See, e.g., United States v. Sandoval, 20 F.3d 134, 136–38 (5th Cir. 1994) (entrapment found and conviction reversed where court found no predisposition to bribe IRS employee); United States v. Lew, 980 F.2d 855, 856 (2d Cir. 1992) (no entrapment found where defendant bribed IRS employee); United States v. Pilarinos, 864 F.2d 253 (2d Cir. 1988) (same).

7.   

Aiding and Abetting — 18 U.S.C. §2

Under 18 U.S.C. §2, whoever “aids, abets, counsels, commands, induces or procures” the commission of a federal crime, or “causes” its commission by another, is guilty as a principal of the crime. This section creates derivative liability for all federal criminal offenses, including those contained in the Internal Revenue Code.³⁸¹United States v. Murph, 707 F.2d 895 (6th Cir. 1983) (defendant caused another to submit a false claim for refund); United States v. Merriwether, 329 F. Supp. 1156 (S.D. Ala. 1971), aff’d, 469 F.2d 1406 (5th Cir. 1972) (individual employee aided and abetted corporation’s failure to pay over FICA taxes to government). To a great extent, this section overlaps §7206(2), discussed above, which provides for the criminal liability of tax preparers. For years courts have been divided on the issue of whether the conviction of an aider and abetter would stand even if the principal were acquitted.³⁸²Compare United States v. Klass, 166 F.2d 373, 380 (3d Cir. 1948) (upholding conviction of aider and abetter) with United States v. Shuford, 454 F.2d 772, 779 (4th Cir. 1971), and United States v. Prince, 430 F.2d 1324 (4th Cir. 1970) (reversing convictions of aiders and abetters where only named principals had been acquitted). See also United States v. Bernstein, 533 F.2d 775 (2d Cir. 1976); United States v. Stevison, 471 F.2d 143, 147–148 (7th Cir. 1972) (courts approved jury instructions indicating that aider and abetter could not be convicted without conviction of principal). The Supreme Court resolved the issue by affirming a Third Circuit opinion holding that an aider and abetter could be convicted of bribery despite the acquittal of a principal, the alleged recipient of the bribe.³⁸³United States v. Standefer, 447 U.S. 10 (1980) aff’g 610 F.2d 1076 (3d Cir. 1979). Courts have since held that even when the principal is not identified, a defendant can be convicted of aiding and abetting if the prosecution proves that the substantive offense has been committed by someone.³⁸⁴United States v. Campa, 679 F.2d 1006 (1st Cir. 1982); United States v. Lopez, 662 F. Supp. 1083 (N.D. Cal. 1987).

8.   

Statute of Limitations for Title 18 Offenses

For Title 18 criminal offenses, except as otherwise expressly provided by law, no person can be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years of when that offense was committed.³⁸⁵18 U.S.C. §3282. For a discussion of the statute of limitations for Title 26 criminal offenses, see I.A.8., above. The five-year statute of limitations begins to run the date the crime is complete.³⁸⁶See Toussie v. United States, 397 U.S. 112, 115 (1970). See, e.g., United States v. Ntekume, No. 2:17-CR-63 JCM (NJK), 2019 BL 377076 (D. Nev. Oct. 2, 2019) (defendant’s motion to dismiss indictment granted because government failed to prosecute him within five years of when crime was completed).

9.   

Failure to File Foreign Bank Account Reporting Form (FBAR) — 31 U.S.C. §5314 & §5322

The requirement that a “United States person”³⁸⁷“United States person” for purposes of FBAR reporting is defined at 31 C.F.R. §1010.350(b) as meaning a United States citizen, a United States resident and an entity formed under the laws of the United States, any state, territory or insular possession of the United States or an Indian tribe. file a Report of Foreign Bank and Financial Accounts FinCEN Form 114 (commonly referred to as an “FBAR”) is derived from the Bank Secrecy Act (BSA) of 1970. The FBAR is not a tax return, but a report filed with the Secretary electronically, using Treasury’s BSA E-Filing System. The report is required of any United States person with a financial interest in, or signatory authority over, one or more financial accounts in a foreign country if the aggregate value of the account(s) exceeded $10,000 at any time during the taxable year. As part of the FBAR reporting requirement, taxpayers are instructed to indicate on their federal income tax return — Form 1040, Schedule B — whether they had an interest in a financial account in a foreign country by checking “Yes” or “No” in the appropriate box. The Schedule B then directs the taxpayer to see FinCen Form 114 and its instructions to determine if an FBAR is required to be filed. The deadline for filing an FBAR for each tax year is on or before April 15th of the following year, with an automatic six-month extension until October 15 (for which no extension form is required).³⁸⁸For tax years before 2016, the form was due on June 30. The due date was changed by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Pub. L. No. 114-41, §2006(b)(11). For any taxpayer required to file an FBAR for the first time, any penalty for failure to timely request, or file for, an extension, can be waived by the Secretary. Pub. L. No. 114-41, §2006(b)(11). The instructions to the FBAR explain how compliance with the statute is achieved and set forth in detail the required information and those persons obligated to comply with the FBAR reporting requirements.

Comment: In March 2009, the IRS initiated the “2009 Offshore Voluntary Disclosure Program” in order to facilitate bringing taxpayers into compliance with their obligation to report income from foreign accounts and to file FBARs.³⁸⁹See March 26, 2009, statement by then Commissioner Doug Shulman on offshore income at http://www.irs.gov/uac/Statement-from-IRS-Commissioner-Doug-Shulman-on-Offshore-Income. The IRS provided guidance in the form of Frequently Asked Questions (FAQs) to explain the program.³⁹⁰See http://www.irs.gov/individuals/international-taxpayers/offshore-voluntary-disclosure-program-frequently-asked-questions-and-answers. See also United States v. Simon, 727 F.3d 682 (7th Cir. 2013) (no relief from criminal liability due to extensions where failure to file was complete prior to issuances of notices extending deadlines); Notice 2010-23 (extended deadline to June 30, 2011), Notice 2009-62 (extended FBAR filing date to June 30, 2010). The Program went through several iterations before terminating in September 2018.³⁹¹https://www.irs.gov/newsroom/irs-to-end-offshore-voluntary-disclosure-program-taxpayers-with-undisclosed-foreign-assets-urged-to-come-forward-now. A streamlined filing compliance procedure remains available for taxpayers who can certify that their failure to report foreign income and file FBARs was not willful.³⁹²https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures. See IRS Pub. 4261, Do You Have a Foreign Financial Account?, for guidance on determining if the taxpayer is require to report a financial account located outside the United States.

In 2003, in an effort to raise the FBAR compliance rate, the Financial Crimes Enforcement Network (“FinCEN”) delegated its enforcement authority for the FBAR to the IRS by means of a Memorandum of Agreement between FinCEN and the IRS.³⁹³See Memorandum of Agreement delegating enforcement authority to IRS, 68 Fed. Reg. 26,468 (May 16, 2003)) (codified at 31 C.F.R. §1010.810(g)). The IRS has authority to assess and collect civil penalties for noncompliance with FBAR requirements, investigate possible violations, employ administrative summonses, issue administrative rulings and take any other action reasonably necessary for enforcement of these provisions, including pursuit of injunctions. Included among the reasons cited for the delegation of enforcement authority are the greater resources available to the IRS to devote to FBAR compliance.

Responsibility for FBAR compliance within the IRS rests with the Small Business/Self-Employed Division (“SB/SE”). In further recognition of the importance of the IRS’s role in the fight against terror and money laundering, SB/SE established the BSA Examination Group. The chief, BSA Examination, reports directly to the Director, Specialty Examination.³⁹⁴IRM 1.1.16.5.3.4 (06-01-16). See IRM 4.26.16 (6-24-21) and IRM 4.26.174 (12-11-19) for IRS internal guidance on ensuring compliance with the reporting and recordkeeping requirements for foreign financial accounts.

In a further effort to improve FBAR compliance and enforcement, Congress included in the American Jobs Creation Act of 2004 (2004 AJCA) a civil penalty for the non-willful violation of FBAR reporting requirements³⁹⁵31 U.S.C. §5321(a)(5)(A), §5321(a)(5)(B). and increased the penalty for willful violations from a maximum of $100,000 to the greater of $100,000 or 50% of the amount of the transaction or the balance in the account at the time of the violation.³⁹⁶31 U.S.C. §5321(a)(5)(C). The civil penalty imposed for non-willful violations must not exceed $10,000 (adjusted for inflation).³⁹⁷For inflation-adjusted amounts, see Tables, Charts & Lists (Federal), Penalties, FinCEN Civil Penalties. The non-willful penalty will not apply if such violation was due to reasonable cause.³⁹⁸31 U.S.C. §5321(a)(5)(B). For inflation-adjusted amounts, see Tables, Charts & Lists (Federal), Penalties, FinCEN Civil Penalties.

Comment: Although the statutory maximum changed, the regulation fixing the maximum penalty for a willful violation at $100,000 remained unchanged for over 17 years. During this time, courts split as to whether the regulation was invalidated by enactment of the statute.³⁹⁹Compare United States v. Colliot, No. AU-16-CA-01281-SS, 2018 BL 175652 (W.D. Tex. 2018) (regulation controls, maximum FBAR willful penalty per year is $100,000); United States v. Wadhan, 325 F. Supp. 3d 1136 (D. Colo. 2018) (accord), with Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019) (2004 amendment invalidates the regulation; maximum willful penalty is the greater of $100,000 or 50% of the account balance on the date of the violation); United States v. Schoenfeld, 396 F. Supp. 3d 1064 (M.D. Fla. 2019) (accord). This split is now moot, as the relevant regulation was amended to reflect the changed penalty amounts in December 2021.⁴⁰⁰See 31 C.F.R. §1010.820, 86 Fed. Reg. 72,844 (Dec. 23, 2021) (removing subsection (g) which previously contained penalty cap).

The 2004 AJCA made no changes to criminal FBAR penalties under 31 U.S.C. §5322. Criminal violations of the FBAR rules can result in a fine of not more than $250,000, or five years in prison, or both.⁴⁰¹31 U.S.C. §5322(a). If the FBAR violation occurs while violating another law or as part of a pattern of illegal activity, the penalty is increased to up to 10 years of imprisonment and $500,000 in fines.⁴⁰²31 U.S.C. §5322(b). The assessment of a civil penalty does not preclude imposition of the criminal penalty or prosecution.⁴⁰³31 U.S.C. §5321(d).

Prior to the establishment of the Offshore Voluntary Disclosure Program, the IRS and the Department of Justice Tax Division prioritized the prosecution of taxpayers who failed to report substantial amounts of income earned through offshore accounts and failed to file FBARs, and their enablers.⁴⁰⁴See the IRS Offshore Tax Avoidance webpage, https://www.irs.gov/newsroom/offshore-tax-avoidance-and-irs-compliance-efforts, which lists criminal cases arising out of its program from the conviction of Igor Olenicoff, an Orange County, California, real estate developer, in late 2007, through February 2015, and the Department of Justice’s Offshore Compliance Initiative webpage, https://www.justice.gov/tax/offshore-compliance-initiative. Although these webpages have not been updated for several years, the IRS and the Department of Justice continue to actively prosecute taxpayers who fail to report offshore income and willfully fail to file FBARs. Many of the criminal prosecutions with respect to foreign bank accounts arise with respect to non-FBAR criminal statutes. For example, a taxpayer who provides a false answer to the foreign bank question on Schedule B of the Form 1040 can be prosecuted under §7206(1). That section makes it a felony for a taxpayer to willfully make and subscribe under penalties of perjury any return that he does not believe to be true and correct as to every material matter. Moreover, a person may not avoid criminal prosecution by failing to provide an answer to the foreign bank account question. Also, a taxpayer’s omission from his income tax return of income from a foreign bank account in the form of interest, dividends or capital gains can result in criminal exposure under §7201 (tax evasion) and §7206(1).

Comment: Criminal enforcement of tax crimes which have a foreign component — such as the failure to report the existence of a foreign bank account — have historically presented difficulty for prosecutors because of legal obstacles in obtaining evidence that is necessary to prove the crime beyond a reasonable doubt. The U.S. government has greatly expanded its ability to obtain foreign based information over the last 20 years through domestic legislation and the expansion of tax treaties, mutual legal assistance treaties (MLATs) and tax information exchange agreements (TIEAs). See discussion, below, in III.C. (Obtaining Foreign Based Data). More recently, the government has utilized the powerful “John Doe” summons (see III.A.3., below) to greatly expand its ability to obtain evidence as demonstrated by the government’s multi-faceted enforcement effort relating to the Swiss bank UBS and its United States account holders. For a discussion of the UBS investigation, see III.C.6., below.

Comment: Reflecting the growing importance of international tax enforcement, Congress enacted legislation as part of the 2010 HIRE Act that: (1) requires more foreign banks to comply with certain reporting and withholding requirements; and (2) substantially increases the amount of information reporting on income tax returns for taxpayers engaged in any foreign financial transactions or who own property outside the United States.⁴⁰⁵See 2010 HIRE Act, Pub. L. No. 111-147, §511–§513; I.R.C. §1471, §1472, and §6038D.

For a discussion of the history of the FBAR, FBAR reporting requirements, and enforcement of those requirements, see 6085 T.M., Report of Foreign Bank and Financial Accounts (FBAR) (Foreign Income Series).

10.   

Failure to Report Beneficial Ownership Information

The Corporate Transparency Act (CTA) requires certain companies to report their beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN).⁴⁰⁶31 U.S.C. §5336(b), added by Pub. L. No. 116-283, Div. E, Title LXIV, §6403(a). For a further discussion of the BOI reporting requirements, see 6565 T.M., FATCA — Information Reporting and Withholding Under Chapter 4 (Foreign Income Series). Each reporting company must (with certain exceptions) submit a report to FinCEN that includes identifying information for each of its beneficial owners and applicants.⁴⁰⁷31 U.S.C. §5336(b)(1), 31 U.S.C. §5336(b)(2).

In 2022, Treasury issued final rules addressing the FinCEN BOI reporting requirements.⁴⁰⁸See Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022) (31 C.F.R. §1010.380 et. seq.). The reporting deadlines are as follows:

Any entity that no longer meets the criteria for exemption from reporting under 31 C.F.R. §1010.380(c)(2) must file a report within 30 calendar days after the date that it no longer meets the criteria for any exemption.⁴¹²31 C.F.R. §1010.380(a)(1)(iv).

If there is any change with respect to information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company must file an updated report within 30 calendar days after the date on which such change occurs.⁴¹³31 C.F.R. §1010.380(a)(2).

It is a violation for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN, or willfully fail to report complete or updated BOI to FinCEN.⁴¹⁴31 U.S.C. §5336(h)(1); 31 C.F.R. §1010.380(g). Likewise, unless otherwise permitted under the statute, it is unlawful to knowingly disclose or use the BOI obtained through a report submitted to FinCEN or a disclosure made by FinCEN. 31 U.S.C. §5336(h)(2), 31 U.S.C. §5336(h)(3)(B).

The 2022 final rules clarify that “person” includes any individual, reporting company, or other entity.⁴¹⁵31 C.F.R. §1010.380(g)(1). A person can provide BOI directly or indirectly, including by providing BOI to another person for purposes of a report or application.⁴¹⁶31 C.F.R. §1010.380(g)(3). A person fails to report complete or updated BOI if, with respect to an entity, such entity is required to report, the reporting company fails to report, and such person either causes the failure to report, or is a senior officer of the entity at the time of the failure to report.⁴¹⁷31 C.F.R. §1010.380(g)(4).

Violation of the reporting rule may result in a civil penalty of up to $500 for each day that the violation continues or has not been corrected. Additionally, a criminal penalty of not more than $10,000, imprisonment for not more than two years, or both, may apply.⁴¹⁸ 31 U.S.C. §5336(h)(3)(A). However, under a safe harbor set forth in 31 U.S.C. §5336(h)(3)(C)(i), no reporting penalty will apply if the person both has reason to believe that the submitted report contains inaccurate information and voluntarily, no later than 90 days after submission, submits a revised report. However, the safe harbor does not apply if, at the time of submitting the original report, the person acted for the purpose of evading the statutory reporting requirements and had actual knowledge that the report’s information was inaccurate.⁴¹⁹ 31 U.S.C. §5336(h)(3)(C)(i)(II).

For a further discussion of the BOI reporting requirements, see 6565 T.M., FATCA — Information Reporting and Withholding Under Chapter 4 (Foreign Income Series).

11.   

Unlawful Use and Disclosure of Beneficial Ownership Information

The CTA makes it unlawful for any person to knowingly disclose or knowingly use BOI obtained by that person through a report submitted to, or an authorized disclosure made by, FinCEN, unless such disclosure or use is authorized under the CTA.⁴²⁰See 31 U.S.C. §5336(h)(2). In an effort to implement these provisions, Treasury issued proposed regulations governing the access and disclosure of BOI by authorized recipients, providing safeguards to ensure the security and confidentiality of information reported to FinCEN, and detailing the use of FinCEN Identifiers by certain reporting companies.⁴²¹Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, 87 Fed. Reg. 77,404 (proposed Dec. 16, 2022) (to be codified at 31 C.F.R. §1010.955) (proposed to be effective January 1, 2024, to align with the date on which the final BOI reporting rule at 31 C.F.R. §1010.380 becomes effective). Current regulations authorize the disclosure of all Bank Secrecy Act (BSA) information received by FinCEN, whereas proposed regulations would clarify that the disclosure of BOI would be governed by the limited and specified circumstances in proposed 31 C.F.R. §1010.955 instead of 31 C.F.R. §1010.950(a).⁴²²Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, 87 Fed. Reg. 77,404 (proposed Dec. 16, 2022) (to be codified at 31 C.F.R. §1010.950(a)). While these proposed regulations reinforce the general prohibition on disclosure,⁴²³See Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, 87 Fed. Reg. 77,404 (proposed Dec. 16, 2022) (to be codified at 31 C.F.R. §1010.955(a)) (noting that except as authorized elsewhere in 31 C.F.R. §1010.955, BOI reported to FinCEN is confidential and should not be disclosed by any individual who receives it). they also provide guidance as to when FinCEN may disclose confidential BOI to: (1) federal, state, local, and tribal government agencies; (2) foreign law enforcement agencies and judicial entities; (3) financial institutions; (4) federal functional regulators and other regulatory agencies; and (5) officers and employees of the Treasury.⁴²⁴See Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities, 87 Fed. Reg. 77,404 (proposed Dec. 16, 2022) (to be codified at 31 C.F.R. §1010.955(b)(1)–§1010.955(b)(5)). The parameters for access, use, and disclosure, as well as security and confidentiality requirements, and the penalties for unlawful use and disclosure of BOI are detailed below.

1.   

Reporting Requirements — 31 U.S.C. §5331; §6050I

Section 6050I requires businesses that receive cash in excess of $10,000 in one transaction (or two or more related transactions) to file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, with the IRS, and to provide a related statement to the payer. Consequently, a tax practitioner may be required to file Form 8300 if he receives cash in excess of $10,000 either for client fees, for the account of a client, or as an agent for a client.⁴⁸⁸United States v. Blackman, 72 F.3d 1418 (9th Cir. 1995) (unless receipt of cash for fees is so intertwined with subject of representation, attorneys must comply with Treasury regulation). The general rules of confidentiality of tax return information under §6103 do not apply to the information on Form 8300. Section 365 of the USA Patriot Act, Pub. L. No. 107-56, provides for government-wide access on matters such as reports on cash transactions. See 31 U.S.C. §5331. Taxpayers required to report information about financial transactions to the Financial Crimes Enforcement Network, pursuant to 31 U.S.C. §5331, must report on Form 8300. Reg. §1.6050I-1(a)(1)(ii). The 2002 Job Creation and Worker Assistance Act, Pub. L. No. 107-147, §401, provides that any person required to file Form 8300 for any tax year after March 9, 2002, may electronically furnish such statement to any recipient who has consented to the electronic provision of the statement in a manner similar to the one permitted under Reg. §31.6051-1(j), or in such other manner as provided by the IRS. On September 19, 2012, FinCEN announced that businesses could electronically file Form 8300 using its Bank Secrecy Act Electronic Filing System. See https://www.fincen.gov/news/news-releases/fincen-announces-electronic-filing-form-8300. See IR-2020-168 (July 22, 2020) for guidance on filing Form 8300 electronically.

Every clerk of a federal or state criminal court who receives more than $10,000 in cash as bail for any individual charged with an offense involving a controlled substance, racketeering or money laundering (or a substantially similar criminal offense under State law) is required to file a return with respect to the receipt of such bail.⁴⁸⁹§6050I(g); Reg. §1.6050I-2(a). See also CCA 199952009 (Pennsylvania district judges authorized under state law to receive bail, being within regulatory definition of clerk because they are authorized to receive bail, are responsible for ensuring that Form 8300 is prepared and filed).

Reporting is required for any “transaction,” or two or more related transactions, involving the receipt of more than $10,000 in cash.⁴⁹⁰§6050I(a). See, e.g., United States v. Casablanca Motors, Inc., 863 F. Supp. 50 (D.P.R. 1994) (transaction involving payment of over $10,000 in cash, occurring exclusively in Puerto Rico, is subject to reporting requirements); CCA 200102049 (payment of account receivable is reportable if amount paid exceeds $10,000). See also CCA 200103069 (where individual makes cash payments on behalf of large group, Form 8300 should include tax identification number of group).

A transaction includes: a sale of goods or services; a sale of real property; a sale of intangible property; a rental of real or personal property; an exchange of cash for other cash; the establishment or maintenance of or contribution to a custodial, trust, or escrow arrangement; a payment of a preexisting debt; a conversion of cash to a negotiable instrument; a reimbursement for expenses paid; or the making or repayment of a loan. A transaction cannot be divided into multiple transactions in order to avoid reporting.⁴⁹¹Reg. §1.6050I-1(c)(7)(i). Transactions are related if they are conducted between a payer (or its agent) and the recipient of cash in a 24-hour period, or if the recipient knows or has reason to know that each transaction is one of a series of connected transactions.⁴⁹²Reg. §1.6050I-1(c)(7)(ii). See Reg. §1.6050I-1(c)(7)(iii) Ex. (5). It is a felony for a purchaser to cause a seller to file a materially false Form 8300.⁴⁹³United States v. Guevara, 894 F.3d 1301, 1307 (11th Cir. 2018) (defendant who used straw buyer to purchase several luxury automobiles with cash so that his name did not appear on Form 8300 is guilty of violating 31 U.S.C. §5324(b)(2)), on remand, No. 14-CR-20792-JLK, 2019 BL 13036 (S.D. Fla. 2019).

The manner in which the receipt of multiple payments is reported depends on the dollar amounts of the initial and subsequent payments. An initial payment in excess of $10,000 must be reported within 15 days of its receipt.⁴⁹⁴Reg. §1.6050I-1(e)(1). The 15-day rule may be extended for taxpayers affected by federally declared disasters or (effective for fires for which assistance is provided after November 15, 2021) significant fires or terroristic or military actions (§7508A, Pub. L. No. 117-58, §80504) or Armed Forces serving in combat zones (§7508). See also Tables, Charts and Lists (Federal), Postponements, Listing of Postponements Due to Combat Zone Service or Federally Declared Disaster Area. If the initial payment does not exceed $10,000, payments received within one year must be aggregated with the initial payment and reported within 15 days after the aggregate amount exceeds $10,000. Payments received after Form 8300 has been filed must be reported if the aggregate amount received within a one-year period exceeds $10,000. The report must be filed within 15 days after receipt of the payment which causes the aggregate amount to exceed $10,000. If, within a 15-day period, more than one report would otherwise be required for multiple cash payments that relate to a single transaction (or two or more related transactions), the recipient can file a single combined Form 8300 with respect to these payments. The combined Form 8300 must be filed no later than the due date of the first of the separate reports.⁴⁹⁵Reg. §1.6050I-1(b)(1)–(3). See, e.g., CCA 200102049. Additionally, in PMTA 2018-11, the IRS advised that in the event of a failure to file Form 8300, there is no legal prohibition against the IRS requesting one Form that summarizes all of the Forms 8300 that a taxpayer should have reported in a given tax year. Note, however, that the IRS may still assess a penalty for each Form the taxpayer should have filed. PMTA 2018-11.

For amounts received before February 3, 1992, cash included the coin and currency of the United States and of any other country, which circulate in and are customarily used and accepted as money in the country in which issued, including U.S. notes and Federal Reserve notes.⁴⁹⁶Pre-1990 RRA §6050I(d); Reg. §1.6050I-1(c)(1)(i). Effective for amounts received on or after February 3, 1992, cash also includes cashier’s checks (including treasurer’s checks and bank checks), bank drafts, and traveler’s checks or money orders with a face amount of not more than $10,000 that is received in a designated reporting transaction or any transaction in which the recipient has knowledge that such instrument is being used to evade the reporting requirements.⁴⁹⁷§6050I(d); Reg. §1.6050I-1(c)(1)(ii). A designated reporting transaction is a retail sale of a consumer durable, a collectible, or a travel or entertainment activity. Reg. §1.6050I-1(c)(1)(iii). See CCA 200034027 (pursuant to Reg. §1.6050I-1(c)(1)(iii), even if aggregate sales price exceeds $10,000, information reporting is not required for sale of group of personal property if each item’s sales price does not exceed $10,000; no requirement in the regulations to group for consumer durables). See also CCA 200012047 (winning pari-mutuel betting parlor tickets and vouchers used in placing a bet of more than $10,000 are not cash for purposes of §6050I); CCA 200152047 (automobile auction must file Form 8300 for payment of $25,000 in the form of 50 $500 money orders; Reg. §1.6050I-1(c)(1)(ii)(B) defines cash to include money orders with a face amount of not over $10,000). Effective for returns required to be filed, and statements required to be furnished, after December 21, 2023, cash also includes digital assets.⁴⁹⁸§6050I(d)(3), Pub. L. No. 117-58, §80603(b). Digital assets include, but are not limited to, virtual currency such as Bitcoin, etc., and are defined in §6045(g)(3)(D) as ‘‘any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology” as determined by Treasury. Pub. L. No. 117-58, §80603(b).

For Forms 8300 required to be filed after December 31, 2015, the civil penalty for an intentional failure to file Form 8300 is the greatest of $500 multiplied by the number of failures,⁴⁹⁹§6721(e)(2). or $25,000, or the amount of cash received in the transaction, limited to $100,000 per failure. These amounts are adjusted for inflation.⁵⁰⁰§6721(f)(1)). See 634 T.M., Civil Tax Penalties, for the inflation-adjusted penalty amounts.

For Forms 8300 required to be filed before January 1, 2016, the civil penalty for an intentional failure to file Form 8300 is the greater of $250 multiplied by the number of failures, or $25,000 or the amount of cash received in the transaction, limited to $100,000 per failure.⁵⁰¹§6721(e)(2)(C), before amendment by the Trade Preferences Extension Act of 2015 (2015 TPEA), Pub. L. No. 114-27, §806(d).

While the failure to file a required return or information report normally is a misdemeanor under §7203, due to the importance of the information reporting requirements under §6050I in combating money laundering and illegal drug trafficking, Congress amended §7203 in 1998 to provide that a willful failure to provide information reports required in §6050I would be considered a felony, rather than a misdemeanor.⁵⁰²Section 7203 is discussed further at I.A.3., above.

Most of the IRS’s enforcement activity for violations of §6050I has involved the application of the civil penalties. However, the government has brought a number of felony criminal prosecutions under §7203 for violations of §6050I, where they could demonstrate willfulness, i.e., “an intentional violation of a known legal duty.” The defendant must have known of the reporting requirements and knowingly acted to avoid them.⁵⁰³See Cheek v. United States, 498 U.S. 192, 201 (1991); United States v. Rogers, 18 F.3d 265 (4th Cir. 1994); Kruse, Inc. v. United States, 213 F. Supp. 2d 939 (N.D. Ind. 2002) (where defendant was advised by accountant that he did not need to file Form 8300 and where once defendant was made aware of filing requirement he filed from then on, jury was provided with sufficient evidence to conclude that his violation of reporting requirement was unintentional).

2.   

Failure to File Currency Transaction Reports and Related “Structuring” Violations — 31 U.S.C. §5313 and §5324

The Bank Secrecy Act of 1970⁵⁰⁴31 U.S.C. §5311 et seq. was enacted, in part, to provide the government with certain reports or records which have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.⁵⁰⁵31 U.S.C. §5311. Pursuant to 31 U.S.C. §5313(a) and implementing regulations, all domestic “financial institutions” are required to file a Currency Transaction Report (Form 4789), commonly referred to as a “CTR,” for all cash transactions of more than $10,000.⁵⁰⁶31 C.F.R. §1010.311. The Money Laundering Control Act of 1986 added §5324 to Title 31⁵⁰⁷The Money Laundering Control Act of 1986 also created the money laundering offenses (18 U.S.C. §1956 and §1957) discussed at I.B.4., above. to prohibit certain acts done “for the purpose of evading the reporting requirements of 31 U.S.C. §5313(a).” Pursuant to 31 U.S.C. §5324(a)(1)–(2) and §5324(c)(1), it is a crime for any person to cause or attempt to cause a financial institution to fail to file a CTR or to file a false CTR.

Pursuant to 31 U.S.C. §5324(a)(3) and §5324(d)(1),⁵⁰⁸As amended by Pub. L. No. 107-56, §365. it is a crime for any person to structure, to attempt to structure or to assist in structuring a transaction for the purpose of evading the reporting requirements.⁵⁰⁹For alleged violations of 31 U.S.C. §5313(a) occurring before 1986, there was a conflict among the circuits concerning whether a person could be found guilty of structuring a transaction in order to avoid the reporting requirements. Compare United States v. Tobon-Builes, 706 F.2d 1092, 1097–98 (11th Cir. 1983) (multiple currency transactions on one day totaling more than $10,000 treated as a single transaction for reporting requirements) and United States v. Thompson, 603 F.2d 1201, 1203–04 (5th Cir. 1979) (structuring a $45,000 currency transaction into five separate $9,000 transactions violated reporting requirements), with United States v. Mastronardo, 849 F.2d 799, 804–805 (3d Cir. 1988) (pre-1986 regulations failed to give fair notice that structuring currency transactions to avoid reporting requirements was a crime), and United States v. Anzalone, 766 F.2d 676 (1st Cir. 1985) (regulations failed to give fair notice that structuring transactions over several days to avoid reporting requirements was illegal, thus violating due process). For example, if one desires to deposit in a bank $15,000 in cash but breaks down the transaction into three $5,000 deposits over three days with the purpose to evade having the bank file a CTR, then one commits a felony⁵¹⁰31 U.S.C. §5324(d)(1). in violation of 31 U.S.C. §5324(a)(3).⁵¹¹See, e.g., United States v. Davenport, 929 F.2d 1169, 1171–72 (7th Cir. 1991) (husband and wife convicted for structuring by making 10 separate cash deposits of less than $10,000, totaling $81,500, at multiple branches of two banks); United States v Malewicka, 664 F.3d 1099, 1109–1110 (7th Cir. 2011) (that defendant was aware of the reporting requirement for cash withdrawals over $10,000 established by evidence that she withdrew between $9,000 and $10,000 on 244 separate occasions, with two or more withdrawals in a 24-hour period on 80 occasions, and she never withdrew over $10,000). Similarly, a person who purchases multiple money orders of less than $3,000 each to avoid reporting requirements is guilty of a felony.⁵¹²United States v. Fisher, 291 F. Supp. 3d 356 (W.D. NY. 2017) (an indictment charging defendant with purchasing several money orders from different Western Union locations on the same day to avoid reporting requirements stated an offense under 31 U.S.C. §5324(a)(1)). Making multiple withdrawals not exceeding $10,000 to avoid reporting requirements is also a felony.⁵¹³United States v Malewicka, 664 F.3d 1099, 1109–1110 (7th Cir. 2011) (defendant convicted for violating 31 U.S.C. 5324(a)(3) by withdrawing between $9,000 and $10,000 on 244 separate occasions, with two or more withdrawals in a 24-hour period on 80 occasions, and never withdrawing over $10,000); United States v. Leon, 841 F.3d 1187, 1192–93 (11th Cir. 2016) (defendant guilty of violating 31 U.S.C. §5324(a)(1) by making multiple cash withdrawals of under $10,000 that, when combined, exceeded $10,000).

Under 31 U.S.C. §5312 and 31 C.F.R. §1010.311, the term “financial institution” includes federally insured banks, commercial banks or trust companies, private bankers, agencies or branches of a foreign bank in the United States, thrift institutions, credit unions, SEC registered brokers or dealers, brokers or dealers in securities or commodities, investment bankers or investment companies, currency exchanges, insurance companies, an issuer, redeemer or cashier of travelers’ checks, checks, money orders or similar instruments, travel agencies, operators of credit card systems, business engaged in vehicle sales, dealers in precious metals, stones and jewels, pawnbrokers, telegraph companies, persons involved in real estate closings and settlements, the U.S. Postal Service, and certain specified casinos. Most circuits have held that an individual can be a “financial institution” for currency transaction reporting purposes.⁵¹⁴See, e.g., United States v. Schmidt, 947 F.2d 362 (9th Cir. 1991) (individual held to be “financial institution”); United States v. Gollott, 939 F.2d 255 (5th Cir. 1991) (same); United States v. Tannenbaum, 934 F.2d 8 (2d Cir. 1991) (same); United States v. Goldberg, 756 F.2d 949 (2d Cir. 1985) (same). But see United States v. Bucey, 876 F.2d 1297 (7th Cir. 1989) (court refused to extend definition of “financial institution” to include individual). In Gollott, the Fifth Circuit distinguished Bucey, noting that the Seventh Circuit had interpreted a “superseded regulation and concededly espoused a minority position.” 939 F.2d at 258.

A bank may exempt from the transaction reporting requirements (i) another bank, to the extent of its domestic operations;⁵¹⁵31 C.F.R. §1020.315(b)(1). (ii) federal, state and local governmental agencies and departments and government-established entities that exercise governmental authority;⁵¹⁶31 C.F.R. §1020.315(b)(2), §1020.315(b)(3). (iii) an entity whose stock or equity is listed on the New York or American Stock Exchange or the NASDAQ plus any domestic subsidiary that such an entity owns at least 51% of;⁵¹⁷31 C.F.R. §1020.315(b)(4), §1020.315(b)(5). (iv) a business that maintains an account with it that frequently engages in transactions in currency in excess of $10,000;⁵¹⁸31 C.F.R. §1020.315(b)(6). certain cash withdrawals made for regular payroll purposes.⁵¹⁹31 C.F.R. §1020.315(b)(7). These exemptions will only apply if the bank takes reasonable steps to assure itself that the person is exempt and must document its determination.⁵²⁰31 C.F.R. §1020.315(e)(1).

A business is ineligible to be exempted if more than 50% of its gross revenues is from certain specified activities, including: (i) auctioning of goods; (ii) chartering of boats, buses or aircraft; (iii) gaming; (iv) providing investment advisory or investment banking services; (v) pawnbrokering; (vi) practicing law, accounting or medicine; (vii) engaging in real estate brokering, real estate closings or title insurance; (viii) purchasing or selling any kind of motor vehicles to customers; (viii) trade union activities; and (ix) serving as a financial institution.⁵²¹31 C.F.R. §1020.315(e)(8).

Before 1994, most courts held that a willful violation of the anti-structuring law meant no more than that the defendant knew what he was doing. It did not require that he knew it was illegal.⁵²²United States v. Rogers, 962 F.2d 342, 344 (4th Cir. 1992). See also United States v. McNamara, 74 F.3d 514 (4th Cir. 1996) (listing cases from nine other circuits in accord with the holding in Rogers). In Ratzlaf v. United States,⁵²³510 U.S. 135 (1994). the Supreme Court rejected this view. The Court held that, to support a conviction under the anti-structuring provisions, the government must prove that a defendant knew that structuring a cash transaction to avoid the reporting requirements was unlawful, not simply that the defendant’s purpose was to circumvent the bank’s reporting requirements. The Supreme Court noted that, while some individuals attempt to elude reporting requirements in order to hide criminal activity from government inspectors, currency structuring “is not inevitably nefarious”.⁵²⁴510 U.S. at 144. It gave as examples a person who structures transactions to prevent banks from filing reports in order to reduce the risk of an IRS audit, to prevent the likelihood of a burglary, or to hide wealth from a former spouse.⁵²⁵510 U.S. at 144–45. The Court was unpersuaded that structuring was “so obviously ‘evil’ or inherently ‘bad’” as to satisfy the willfulness requirement “irrespective of the defendant’s knowledge of the illegality of structuring.”⁵²⁶510 U.S. at 146. The Court held therefore that the requirement of willfulness meant that the defendant knew “that the structuring in which he engaged was unlawful.”⁵²⁷510 U.S. at 149.

Applying Ratzlaf, circuit courts reversed and remanded for new trials structuring cases where the juries had not been instructed on the requisite willfulness element.⁵²⁸See, e.g., United States v. Gray, 47 F.3d 1359, 1363 (4th Cir. 1995) (jury instructions omitting willfulness element is reversible plain error); United States v. Rogers, 18 F.3d 265 (4th Cir. 1994) (trial court’s failure to instruct jury that willfulness element in currency transaction structuring offense requires knowledge of illegality, as later held in Ratzlaf, was plain error requiring vacation of defendant’s conviction). But see United States v. Tipton, 56 F.3d 1009, 1012 (9th Cir. 1995) (not plain error where jury was instructed that defendants knew they were assisting in structuring and that this was unlawful). Congress quickly responded to Ratzlaf by passing the Money Laundering Suppression Act of 1994.⁵²⁹Pub. L. No. 103-325. The Act amended 31 U.S.C. §5324 by assigning to structuring its own criminal penalty and removing any reference to a requirement for willfulness to prove structuring offenses. Thus, the government only needs to prove that the defendant intended to evade the reporting requirements to satisfy the mens rea element of a structuring charge.⁵³⁰See United States v. Ismail, 97 F.3d 50, 56 (4th Cir. 1996); United States v. Zehrback, 47 F.3d 1252, 1262 n.7 (3d Cir. 1995).

In 1996, regulations became effective concerning the reporting of suspicious transactions by financial institutions.⁵³¹12 C.F.R. §21.11(c)(4). A Suspicious Activity Report (SAR) has to be filed with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) if the financial institution knows, suspects, or has reason to suspect that a customer has violated a federal law or regulation, and the transaction involves or totals $5,000 or more.⁵³²12 C.F.R. §21.11(c)(4). The financial institution is barred under the regulations from disclosing to its customer the fact that it filed an SAR or the information contained in the SAR. A financial institution is subject to civil penalties⁵³³31 U.S.C. §5321(a)(1). if it fails to file an SAR in appropriate circumstances.

The maximum criminal penalty for a violation of 31 U.S.C. §5324 is a fine of not more than $250,000, imprisonment for not more than five years, or both.⁵³⁴31 U.S.C. §5324(d)(1); 18 U.S.C. §3571. A person violating these provisions while violating another law of the United States or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.⁵³⁵31 U.S.C. §5324(d)(2); 18 U.S.C. §3571.

A person who transports more than $10,000 in currency or monetary instruments into or out of the United States is required to file with the U.S. Bureau of Customs and Border Protection a Report of International Transportation of Currency or Monetary Instruments (FinCen Form 105), commonly referred to as a “CMIR.”⁵³⁶31 U.S.C. §5316; 31 C.F.R. §1010.340(a). A person who, with an intent to evade currency reporting requirements, conceals more than $10,000 in currency in any conveyance, article of luggage or merchandise container, in order to transport or attempt to transport it into or out of the United States is subject to a maximum of five years imprisonment and forfeiture upon conviction.⁵³⁷31 U.S.C. §5332.