Talk:Tax avoidance and tax evasion

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Contents 1 Tax protesters 2 Switzerland 3 Cheek v. United States 4 Too much to chew 5 What's outside the UK? 6 An odd sentence ? 7 How to categorize 8 reverting a muddying of the water 9 Statutory assessment in the United States 10 Keynes quote 11 Criminal vs. civil 12 Fifth Amendment 13 recent addition re Canada "profitable philanthropy" 14 Tax protester rhetoric 15 The distinction in the United States - to be deleted

[edit] Tax protesters

I'm not sure tax protesters should be here at all. There was a moral edge in the text about them which I have tried to neutralise. Psb777 04:19, 30 Jan 2004 (UTC)

[edit] Switzerland

How can it be that in Switzerland, tax evasion is not considered a crime, whereas tax evasion is defined as "by breaking the law"? Is it not a crime to break the law in Switzerland??

And is it legal to "undeclare assets" for tax purposes there? Does anyone actually pay any tax at all in Switzerland??

simon 00:53, 23 Dec 2004 (UTC)

In a sense, using the term "tax evasion" is a bit misleading: most countries differentiate tax avoidance (legally reducing your tax liability) from tax evasion (illegally reducing your tax liability, including fraud), but the Swiss treat most tax transgressions as civil matters, so many acts that would amount to criminal tax evasion in other countries are treated as civil matters in Switzerland and are dealt with in the Swiss tax courts, not the criminal courts. Dishonestly underestimating or failing to report income in a tax return is not considered a crime, unless it amounts to tax fraud (e.g. deliberate falsification of records). [1][2][3] -- ALoan (Talk) 10:24, 23 Dec 2004 (UTC)

By definition it is only a crime to break the criminal code. So there is no contradiction. Tax evasion is not a crime in Switzerland even though the law is being broken. Similarly libel, in most jurisdictions, is not a crime. And trespassing is (was?) not a crime in England. Paul Beardsell 19:10, 23 Dec 2004 (UTC)

---

This easily won't work, at least for individuals in the United States.

IRS regulations require that individuals report all offshore accounts. If the IRS determines that the offshore accounts are used to control other entities, they can go after those other entities. Now it is true that offshore banks may not cooperate with the IRS in tracking down these assets, but the individual is still required by US law to report them.

One way to legally lower the tax due is to establish an independent entity in a tax haven to shelter an individual's income and assets along with an offshore bank account to control the entity's funds. Examples of such entities include an offshore company or corporation (such as an International Business Corporation or IBC), a foundation (such as a Panama Private Interest Foundation) or a trust.

[edit] Cheek v. United States

There is already a Wikipedia article on this case and there is a link to it from the body of this article. Yet we now substantially repeat all the info in the Wikipedia article re this case in this article and we have material here about the case that is not in the Wikipedia article about the case. This is not the correct way of going about things and I suggest, as elsewhere in Wikipedia and as is considered good practice, that we reference the case here, give the quickest summary of its consequences to this article IF NECESSARY and place all info about the case in the article about the case. Paul Beardsell 05:40, 2 December 2005 (UTC)

I disagree - there is bound to be a degree of redundancy in Wikipedia, and it would be difficult to talk about the way courts classify tax protester arguments without going into the details of Cheek, which is a seminal tax protester case wherein the Supreme Court basically sets out the final word on the topic, which continues to this day. Also, there's plenty of material in the Cheek article that is not found here. BD2412 T 12:32, 2 December 2005 (UTC)

I overstated my case somewhat. I am not arguing for absolutely no redundancy but less redundancy than is shown on this particular issue. Further, I am not proposing radical new Wikipedia policy here but simply standard practice. If pushed I am sure I can find the references. But, forgetting all that (for the moment), surely you must agree that central facts about the Cheek case which appears here but not in the article on the Cheek case is not proper organisation of information? Paul Beardsell 20:54, 2 December 2005 (UTC)

Now, to return to the issue of redundancy: Read this article and consider all the information which we could include here but which is referenced from here. This article would be very long indeed. The Cheek case, which is doubtless very important, is but one of a 100 important cases which should be referenced. And we haven't even considered the case law of non-US jurisdictions! Those inclusions, if documented to the same detail as the Cheek case, would then themselves bring up issues which would, by the example set here, require explanation here and thus further inclusions. No! That is just not the Wiki way. Create a separate article for the distinct issue. Refer to it. Paul Beardsell 20:54, 2 December 2005 (UTC)

Redundancy of power supplies is good, redundancy of backups is good, redundancy of information is bad. Why? A major reason is that errors must then be corrected in two places. But, you know, I make the mistake of which I criticise this article: I repeat here what is well covered elsewhere in Wikipedia policy documents. Paul Beardsell 20:54, 2 December 2005 (UTC)

Understood - I'll work on toning down the repetition to what is absolutely necesary to convey the state of the law. BD2412 T 20:59, 2 December 2005 (UTC)

Of course, I ought not to be complaining about it, and relying on you to fix it: I ought to be working to fix it myself. I was anxious about undoing someone else's work but I should not appear to be so critical. Paul Beardsell 00:52, 3 December 2005 (UTC)

[edit] Too much to chew

I think the problem with this article is that it tries to cover too much - we should have seperate articles on tax avoidance (taking legal steps to reduce your tax burden), and tax evasion (taking illegal steps to do the same, including simply not paying what is owed). The former article could point out that tax avoidance is perfectly legal; the latter could point out that some acts claimed to be for avoidance are actually beyond the pale of the law. BD2412 T 03:03, 3 December 2005 (UTC)

I agree: too much is now covered by this article. Doing what BD2412 suggests is a very good idea. I wonder, however, if this article might be kept solely for the purpose of contasting the four concepts (avoidance, evasion, resistance and protest) very briefly before referencing the 4 new articles BDA proposes. I.e. this article would have an introductory paragraph followed by strictly one short para on each of the 4 concepts. Each of the 4 paras would have a preceding link to the main article on the subject. Paul Beardsell 03:54, 3 December 2005 (UTC)

I think that's exactly the right idea. BD2412 T 04:06, 3 December 2005 (UTC)

But what should the quick-contrast/overview-article be called? How about "Not paying tax" or "Not paying taxes" or "Tax avoidance, evasion, mitigation, fraud, resistance and protest: Contrasted"? I am not really happy with any of them. Is it correct to consider all of these to be avoidance - just that most of them are illegal? I am not sure that would help, even if(!) correct. Paul Beardsell 22:01, 6 December 2005 (UTC)

[edit] What's outside the UK?

In the UK, there is no General Anti-Avoidance Rule (GAAR)

Does this mean that in the rest of the world, there is, or is "the rest of the world" "The United States" here?

In other words, could we have some preemptive qualification of the U.S.-specific bits? I'm not demanding we immediately put in tax regulations from all other countries, mind you... JRM · Talk 00:54, 7 December 2005 (UTC)

A correct quote from the current version of the article is "In the UK, there is no US-style General Anti-Avoidance Rule (GAAR), but ...". Paul Beardsell 01:52, 7 December 2005 (UTC)

I still don't understand this. What is GAAR? It seems to be Canadian, not US. --anon

I agree. Needs explanation or removal. Paul Beardsell 04:15, 13 March 2006 (UTC)

How about something along the lines of "In the UK, unlike Canada, Australia, New Zealand and South Africa, amongst others, there is no General Anti-Avoidance Rule (GAAR)"? -- Andrew 20 May 2006.

[edit] An odd sentence ?

I'm not sure what this is supposed to mean: In the UK and elsewhere tax declarations of income from illegal activities are supposedly law enforcement organisations. It's english but does it make sense to you?

I added the original sentence but somewhere along the line it has become corrupted by the removal of a few words. The reason I added the sentence was because someone had added the possibly false and possibly off-topic discussion of tax returns being available to USA law enforcement agencies. I was making the point that this is not generally the case in the UK. In my view the enforcement of laws which have nothing to do with tax is off topic in this article and all about this needs to go. Paul Beardsell 04:13, 13 March 2006 (UTC)

[edit] How to categorize

Tax evasion is a crime, but tax avoidance isn't. Would it make sense to categorize this article under category:crimes? Common Man 05:47, 6 January 2006 (UTC)

I think so. Paul Beardsell 04:09, 13 March 2006 (UTC)

[edit] reverting a muddying of the water

The article now reads, in part:

The term "tax evasion" (or, more precisely, "attempted tax evasion") generally consists of criminal conduct, the purpose of which is to avoid the assessment or payment of a tax that is already legally owed at the time of the criminal conduct. By contrast, the term "tax avoidance" is used to describe lawful conduct, the purpose of which is to avoid the creation of a tax liability. Tax evasion involves breaking the law; tax avoidance is using legal means to avoid owing tax in the first place. An evaded tax remains a tax legally owed. An avoided tax is a tax liability that has never existed.

I have problems with this recent edit.

I am not sure that the use of the word "attempted" is correct. "Tax evasion" is illegal. "Attempted tax evasion" may also be illegal BUT this recent edit gives the impression that the tax is inevitably collected. No! As the Polly Peck affair shows: The money to pay the tax can be transferred overseas to an uncooperative jurisdiction. The tax evasion is not only attempted, it is successul.

Where does the "already legally owed at the time of criminal conduct" come from? Why is it in italics? This gives the impression that this is a commonly accepted definition. Which, I am sure it is not because the word "legally" would never be used. If it is owed it is legally owed. If it is not owed, legally, then it is not owed.

Tax avoidance is NOT _only_ (once again, italics used, why?) "avoid[ing] the creation" of a tax liability. It can also be the removing of an existing tax liability. E.g. the donation of a painting to a national gallery may remove an existing capital gains tax liability. So, "in the first place" is wrong. And "that has never existed" is wrong too.

The more closely and carefully the para is read the more wrong it most definitely is. So I am reverting. I am not saying that there is not room for improvement, just that this is NOT an improvement.

Paul Beardsell 00:29, 13 March 2006 (UTC)

Also: I accept that often tax evasion is facilitated by not being having the tax assessed in the first place. But neither tax evasion nor avoidance has that a necessary prior step. Tax can be assessed and then evaded, as per the Polly Peck example already given. It can also be assessed and then avoided, as per the donated picture example already given. An assessment can be made and then successfully ignored - evasion. Or it can be assessed and then overturned or a reassessment can be caused - avoidance.

So, that edit reverted also.

Paul Beardsell 00:37, 13 March 2006 (UTC)

Dear Paul Beardsell: I apologize for the confusion. I now realize that I, as an American, was writing without thinking about terms being used differently in Britain or other places. (I assume from your reference to the Polly Peck matter you are thinking of British tax law. I am definitely no expert on the Polly Peck matter or British tax law.)

My edits are summaries, for a typical non-tax expert, of what American law is. The American law (section 7201) specifically uses the words "attempts" -- as in "willfully attempts in any manner". Although "attempted tax evasion" is technically the more correct term (and section 7201 is entitled "Attempt to evade or defeat tax," not merely "Tax evasion"), learned American tax practitioners use the terms "tax evasion" and "attempted tax evasion" interchangeably.

From a technical legal standpoint you are actually correct, but your argument actually supports my edit: That is, the "attempted tax evasion" statute criminalizes both successful and unsuccessful evasion or "attempts" at evasion, regardless of how you want to phrase it.

I was trying to make clearer that section 7201 (as described later in the article) criminalizes even the mere attempt at evasion -- even if the attempt is unsuccessful (i.e., where the offender is caught and ends up having to pay the tax after all). I was also trying to make clearer, using non-technical language, that (under U.S. law) you cannot in general attempt to "evade" a tax unless it's already legally owed (with a possible class of exceptions I'll describe below), and that you cannnot generally legally "avoid" a tax unless it's a tax that has never been owed. These concepts are fundamental to an understanding of how the terms "evasion" and "avoidance" are used in American law. Based on my reading of the main article, I assumed (and I still believe) that the article is using those terms in the "American law" sense. (Perhaps that should be changed or clarified.)

I used at least one technical American tax law term ("assessment") without making clear its meaning (see below), and for that I apologize to everybody.

My comments about "already legally owed at the time of criminal conduct" were intended to make clear, through the use of emphatic redundancy, the difference between evasion and avoidance (as the terms are used in the article, and in America particularly). I was using redundancy in an attempt to avoid using technical legal jargon. I was trying to emphasize that there is no "tax" unless it's "legally owed." The article didn't seem to me to make that point adequately clear.

Tax avoidance in this sense is behavior that avoids (to be redundant again) having the tax liability be created at all. That's also what you were saying when you said "If it [the tax] is owed it is legally owed. If it is not owed, legally, then it is not owed." I just thought the article wasn't making that clear. Obviously my edits not only did not clarify enough, they muddied the water for you as you said.

The statement that one can remove an existing capital gains tax liability by donating a painting, etc., is incorrect, at least under American law, in the sense (again, to be emphatically redundant) of a "tax that is legally owed." If you give the painting away, there can be, as a general proposition, no "assessment" of tax with respect to the income you would have realized had you sold the painting instead. Therefore, there can generally be no "assessment and avoidance" merely by donating the painting to the gallery. (That is, you can have "avoided" the tax, but there would never have been any "assessment.")

In America, the term "assessment" as used in the case law interpreting the tax evasion statute refers to the statutory assessment under Subchapter A of Chapter 63 of the Internal Revenue Code. This assessment is performed by a duly appointed officer of the Internal Revenue Service (IRS) who makes a formal entry on the books of the United States Treasury. For Federal income taxes, this formal act occurs only after the close of the tax year -- long after the painting in your example has been donated -- and long after the tax liability has arisen. In fact, this assessment is normally done after the related tax return is filed with the IRS -- long after the tax year has closed.

Now, the taxpayer could "avoid" some income tax he or she might have otherwise realized during the year (i.e., because the charitable contribution deduction for the donation of the painting would offset the taxpayer's income from wages or sales of other assets or other income, causing the income tax for the year to be lower than it would otherwise have been). One could also say that the taxpayer has "avoided" the tax that would have been incurred had the taxpayer instead sold the painting at a gain. These scenarios are consistent with the language of my edit. Under American law the Federal income tax liability arises at the close of the tax year, not earlier, at the time the income is realized. (Here, I am not talking about the liability for withholding taxes or the obligation to make interim payments of estimated tax -- I am talking about the actual Federal income tax liability imposed under Code section 1 in the case of individuals, section 11 in the case of corporations, etc.).

American income tax law is based on the concept of a "realization" event. Until you actually sell the painting or give it away, there is no tax -- for the simple reason that there is no realized income. However, even after the income realization event occurs, there is still no actual tax liability until one further event occurs -- the close of the tax year. This is because the tax is imposed on something called "taxable income" under section 63. The tax is not imposed on each individual realization of income during the year. It's imposed on what is essentially a legal and accounting concept ("taxable income") that cannot be defined until and unless the tax year closes.

All you have until you sell or otherwise dispose of an asset is an "unrealized gain." (And if you give the painting away to the gallery, there is a realization event but of course there is no income, as you received nothing in return.)

Also, my edit did not state that tax evasion or tax avoidance has "assessment" as a necessary step. I was trying to make clear (unsuccessfully, perhaps) a key point of American tax law -- that attempted evasion can be an attempt to evade the assessment (using the term as the U.S. statutes and courts use it), or it can be an attempt to evade the payment of a tax.

There are possible exceptions to the rules I've laid out. For example, I suspect that a taxpayer might be guilty (under U.S. law) of attempting to evade a Federal income tax that was not yet legally owed (for example, because the tax year had not yet closed) if the taxpayer were taking steps prior to the close of the tax year such as hiding the funds he or she realized in an income event. I would have to do a little digging in the case law to see if this is a real exception. As a practical matter, however, the taxpayer could never be prosecuted or even discovered until after the tax year had closed -- and by that time the conduct, the attendant circumstances, and the taxpayer's mens rea would have merged into a "complete section 7201 offense" (to use another emphatic redundancy) anyway.

American tax law is highly technical, with many exceptions, and is often difficult to explain to both tax practitioners and normal people, and I suspect the same may be true of the tax law of Britain and other nations. Much of your commentary is actually consistent with what I meant to convey, so I believe you are correct that I failed in my purpose on this edit. Yours, Famspear 06:23, 13 March 2006 (UTC)

Post script: Dear Paul Beardsell: Another reason that the term "attempt" is important is that the American courts have specifically interpreted "attempts" in section 7201 to require an affirmative act (comission) to find an offense; a mere failure to act, or omission (such as failing to file a return) is not sufficient for a 7201 conviction. This is also stated in the article, and is not really germane to your problems with my edit -- but I just wanted to point out that the requirement of an affirmative act is one of the elements that the prosecution must prove in a section 7201 case -- and that element comes from the word "attempts." Yours, Famspear 06:31, 13 March 2006 (UTC)

Post-post script: Dear Paul Beardsell: At the expense of appearing to beat a dead horse, I want to emphasize that your statement that tax avoidance (as the term "avoidance" is used in the article in the "American" sense) "can also be the removing of an existing tax liability" is thus incorrect. Once the tax "exists" (i.e., once it's legally owed), you cannot "avoid" the tax in the sense in which that term is being used in most of the article. My edits reflected accurate summaries of American law on the distinction between tax avoidance and tax evasion - albeit without an elaborate explanation of the attendant intricacies (some of which I addressed in my comments above). Yours, Famspear 08:05, 13 March 2006 (UTC)

If the term avoidance is used in this article is always used in some uniquely American sense then that would be a mistake in an encyclopedia meant for more than just American readers. But I dispute what you say: I have a enough understanding of UK, Australian, NZ and South African tax law to believe the avoidance / evasion distinction (legal reduction of tax bill / illegal non-payment of tax) is the same in all those jurisdictions. That the terms as used nowadays worldwide may have originated in the USA does not mean that only the USA position should be documented. It so happens that what the article said before the edits I reverted was valid in the USA. Paul Beardsell 11:08, 13 March 2006 (UTC)

All you are saying is that AS CURRENTLY ENACTED IN THE USA that TAX AVOIDANCE is IMPOSSIBLE AFTER ASSESSMENT. OK. But were it possible (or should it ever become possible in the USA in the future) it would be (or will be) called AVOIDANCE. And then the article would be wrong even for the USA, not only elsewhere. Paul Beardsell 11:08, 13 March 2006 (UTC)

For the sake of argument let us assume that what is tax law in the USA in this respect (that avoidance of an existing "assessed" tax liability is impossible) is true in every tax jurisdiction worldwide. Then I ask the question: Should there be a re-reading of the tax code, a new interpretation by the courts or an amendment to the tax code in the USA or somewhere else in the world such that after a particular example of a tax which has been "assessed" or billed or determined need not be paid should some declaration or promise or technical procedure be followed; then what would one call that behaviour by the taxpayer? It would be called avoidance. Paul Beardsell 11:08, 13 March 2006 (UTC)

So, I don't care what the detail of USA tax code is: Just because such a declaration / promise / procedure is currently impossible in the USA once the tax has been "assessed" does not mean that tax cannot be avoided elsewhere (or possibly at some time in the future in the USA) after the tax bill has been sent by the taxman to the taxpayer. Paul Beardsell 11:08, 13 March 2006 (UTC)

There are examples in UK tax law where one can elect years after a tax bill has been received and even paid to claim a status and either not pay the tax or have paid tax refunded or to have one tax substituted for another, tus avoiding tax. E.g. In some circumstances it takes some time after emigration before the UK Inland Revenue will accept that one is no longer "ordinarily resident" in the UK. But when this is established (three tax years later), the three years' tax due, assessed and paid after emigration but while one's official residence status is unclear is refunded. Should the emigration have been so as to pay less tax then the tax saved would be avoidance, not evasion. Paul Beardsell 11:08, 13 March 2006 (UTC)

We make a mistake in trying to document the specific, tax code of any one tax jurisdiction in this article. We need to say in general terms what tax avoidance is and what tax evasion is, to contrast the two in such a way that the reader will have the necessary information at hand to distinguish between the two in any tax regime, even if the details of that tax regime are not known to the writers of this article. Paul Beardsell 11:08, 13 March 2006 (UTC)

That is why I say the water was muddied. Clear principles were substituted by a detailed expose of some particular and peculiar aspects of one of the world's many tax codes. Paul Beardsell 11:08, 13 March 2006 (UTC)

I suggest the detail you want to add is required at Wikipedia but in a US specific sub-section or in a different article. Paul Beardsell 11:08, 13 March 2006 (UTC)

Dear Paul Beardsell: Yes, I pretty much agree with the thrust of your comments. The article should keep a world-wide view (not be limited to American law).

When you say you're "disputing" what I say, I'm not sure what you mean, because it appears we're mostly in agreement now -- in particular, that the term tax "avoidance" is apparently used differently in different jurisdictions, and that my edits did not take that into account.

I like your statement: "We need to say in general terms what tax avoidance is and what tax evasion is, to contrast the two in such a way that the reader will have the necessary information at hand to distinguish between the two in any tax regime, even if the details of that tax regime are not known to the writers of this article." However, because of the variances among different countries I don't know if we can accomplish this goal by making only general statements that will supposedly apply to all nations' laws. This tactic might work for some topics, but perhaps not for something like tax law.

Instead, I think it would be more helpful to expand the number of specific examples from the laws of a few other nations. The detailed illustration of the application of section 7201 of American law, which has been in the article for some time, is I believe very helpful. (Granted, I may have written it myself, so perhaps I have a bias.) Perhaps you and some of the other editors who are familiar with the laws of other countries can show how the terms are used differently. The article as currently written may be too "America-centric." I think the article can be improved by adding a few more contrasting examples, not by removing the American perspective that has been there for some time.

Regarding my recent, specific edits that you reverted, I generally agree with you, and I don't want to add my edits back to the article. The fact that you had so much of a problem with them might mean that other readers would have the same problems as well. Thanks for your constructive criticism. Yours, Famspear 16:42, 13 March 2006 (UTC)

Post script: Dear Paul Beardsell: Maybe we can work together on some language that improves the article. (I just can't work on it right now.) I also agree that any language on U.S. law, if added back, should be in a "US specific sub-section," or in a different article (if this one just gets to be to long, etc.). I'll get back to you, hopefully maybe later this week. Right now I have a March 15th tax deadline with which I must deal. Yours, Famspear 17:42, 13 March 2006 (UTC)

Dear Paul Beardsell: Well, now I see where my edits have apparently been restored to the article a couple of times. I just can't deal with this right now, but I've got a pretty good idea for some modifications to the language that might allay your concerns. I'll try to get to it soon. Yours, Famspear 20:15, 13 March 2006 (UTC)

Dear Paul Beardsell: OK, I've left the restored edits in, but I have made some modifications in an attempt to clarify where the discussion is really dealing with United States law - as well as a clarification on where the UK regime (as opposed to "worldwide" concepts) is really being discussed. This should be a start. See what you think. Maybe you or some other editors familiar with the UK model of evasion-avoidance can elaborate in the discussion on the UK. Yours, Famspear 20:54, 13 March 2006 (UTC)

---

Famspear, have you read the "too much to chew" section above? I continue to worry that the overview is lost. We have anecdotes, we have detailed exposition of highly technical matters of US Law - detail belonging to a legal text book rather than an encyclopedia. Or, if it does belong here, it must make way for the general principles. I would rather cull than add material but, understandably, editors are hostile to the loss of their carefully crafted work. So, I ask: What do you think of the suggestion in "too much to chew"? Paul Beardsell 12:25, 14 March 2006 (UTC)

Dear Paul Beardsell: Yeah, I would tend to agree with BD2412's ideas. I don't have time to really deal with Wikipedia much today, so you might want to consider taking a shot at it. Yours, Famspear 18:17, 14 March 2006 (UTC)

Construction, not destruction: The info you have added is (in my [should possibly be a little more] humble opinion) interesting and useful. It seems the constructive editors here are agreed: (i) that the more info the merrier, (ii) that a plain and simple introduction avoiding country specifics is desirable and (iii) some reorganisation work is required. A separate section for each country with notable differences from the most common features of tax evasion and avoidance law is, I think, desirable. The newly rewritten and improved Switzerland info is an early candidate for that. Although I think it best if eventually the "too much to chew" suggestion, above, is implemented. Paul Beardsell 04:28, 20 March 2006 (UTC)

[edit] Statutory assessment in the United States

Dear fellow editors: I see that a small edit war has been going on regarding the following language:

(or, in jurisdictions such as the United States, the payment or statutory assessment) of taxes by illegal means.

The language in the parentheses is language that I added a few days ago. If it will stop the edit war, I would like to suggest that my language be left out of the article. Although the language is correct, the same point is covered further down in the article, in the discussion about U.S. law. Hopefully this will be acceptable to everyone. Yours, Famspear 18:02, 19 March 2006 (UTC)

I agree. The info is useful - I just think we must keep the intro to these various topics simple and expand later in the article. Paul Beardsell 04:31, 20 March 2006 (UTC)

[edit] Keynes quote

I deleted the Keynes quote "The avoidance of taxes is the only intellectual pursuit that carries any reward." Although this is often attributed to Keynes, I have never seen a source given. More importantly, it does not say anything important about tax avoidance (though it does say something relevant about other intellectual pursuits). James Kessler

[edit] Criminal vs. civil

I am interested in expanding the tax evasion page (or having a separate section) that is about the different parts of tax evasion that the US (I'm concentrating here on federal tax evasion) generally brings criminal actions and civil actions for. For example, as the article states, if someone omits certain assets or earnings that he has, and therefore evades taxes (and does so knowingly), I was told that the US will rarely if ever bring a criminal action against the person, even though this is a crime. This is because the person will simply say that his tax return stemmed from his own interpretation, and the prosecutor will obviously have a very hard time showing that there was willful evasion. So, although this kind of tax evasion is crime, it is rarely litigated as crimes - rather, the US will litigate it civilly, and will litigate it basically being a debt owed, rather than a crime committed, if that makes sense. I was wondering if people know anything about this, and also whether people know of good sources for these issues.

I am also interested in what kinds of tax evasion are actually crimes. For example, not filing a return at all is a crime, but I was told that filing a tax return in full and simply not attaching a check is not a crime. Even if you attach a note saying I owe this taxes, but sorry, I'm not paying it, it's still not a crime. I'm pretty sure that this is wrong, note or no note (or rather, it is a crime if this is done knowingly, and clearly with the note, it is knowingly committing evasion). Any confirmation? Also, say the note is included and it is counted as a crime. Will the US pursue a civil or criminal action, in the typical case?

It would really help me out if some knowledgeable person could at least address these issues on the talk page if not add something to the article.

[Note: Above comments added by Borntostorm on 15 September 2006]

Wow, very interesting comments and ideas from Borntostorm. Stay tuned! Yours,

Famspear 00:48, 16 September 2006 (UTC)

Peter Reilly 01:42, 17 September 2006 (UTC)

United States tax crimes are in Sections 7201 to 7217. Failure to pay or report is criminal only if it is "Willfull". This has been the source of tax payer victories. In protester literature you will find reference to the Cheek case which ruled that "good faith" belief in invalidity of laws, even though unreasonable negated willfullness. It is important to note that all this would do is keep Cheek out of jail if he could convince a jury he actually believed that nonsense, not prevent his property from being seized.

If you check out the website for the IRS Criminal Investigation Department you will see that not very many people get criminally charged under the tax laws each year. Its in the hundreds not thousands. There is a group that advocates paying what would be your taxes to a not for profit as an act of civil disobedience (These people are clearly saying that they know they are breaking the law). Apparently they have been doing it a long time with no prosecutions.

There is a procedure called "offer in compromise" that will allow you to pay less than what has been assessed (These are the source of those commercials about paying your taxes for cents on the dollars), based on ablility to pay. If you file a return there is a three year statute of limitations on them changing the amount of tax (The three years become six if there is substantial understatment of income). What I wasn't aware of all that much was that there is a ten year statute of limitations on collections. Even though you know you owe it and they know you owe it - no question about validity of the assessment - after ten years of not paying you are home free.

A recent development is that if you send in an offer in compormise and it is not acted on within two years it is deemed accepted.

Basically if you don't want to pay there is a fairly good chance that you will get away with it particularly if you can by without owning property or having bank accounts. If there are assessments though at some point they will make your credit score really suck.

There is a sense in which the protesters are right that the IRS is bluffing to some extent. Not because they don't have the law on their side, but more because they don't have a lot of resources relative to the job they have. Congress might not want to repeal the estate tax, but that doesn't prevent the administration from laying off half the IRS attorneys who work on estate taxes.

I read a GAO report which indicated that IRS CID keeps getting dragooned into fighting other types of white collar crime. The problem is that there is no other federal law enforcement agency for tax crimes.

[End of 17 September 2006 comments by editor Peter Reilly]

Yes, I think the number of tax convictions each year runs only about two or three thousand nationally. That is a very low number if you think about it.

Although tax investigations are handled by the Criminal Investigation division of the IRS, the prosecutions are handled by the Department of Justice (DOJ) -- which is very picky about which cases it will prosecute. About half the cases referred to DOJ by the IRS are actually accepted. However, of those that are accepted, a fairly high percentage (I think above 80%) result in convictions. And if you're convicted, there is a high probability you will do at least some jail time.

In the Cheek case, the Court actually ruled that a good faith believe in the invalidity of the tax law (i.e., a good faith belief that the tax law is unconstitutional) is not a valid defense to willfulness (i.e., does not negate willfulness). Indeed, the Court seemed to indicate that evidence that the taxpayer had argued that the tax law is invalid might actually help prove willfulness -- might actually show that the taxpayer is AWARE of the tax law. However, the Court also ruled that a good faith belief that, for example, "wages are not income" -- because of a misunderstanding of the tax law itself (as opposed to a belief that the law is invalid) WOULD be a valid defense, even though that good faith belief is irrational or unreasonable. However, as in any criminal case, the jury (not the defendant) makes the determination as to whether the defendant actually believed what he claims he believed.

I think the point about the IRS bluffing is well taken. The tax laws are valid -- but IRS audits of income tax returns generally run around 1% of filed returns per year (give or take). Criminal prosecutions are very low, as editor Peter Reilly has noted. The IRS relies mainly on taxpayer honesty and to a lesser degree on taxpayer fear of getting caught cheating. The chances of getting caught cheating are often relatively low. Yours, Famspear 01:45, 19 September 2006 (UTC)

Dear fellow editors: Regarding the comments above by editor Borntostorm, my sense (with no data, however, to back it up yet) is that Borntostorm is correct that the U.S. government rarely brings a criminal action against someone for omitting earnings -- but that this is not because of the difficulty of overcoming the taxpayer’s interpretation in showing willful evasion. If you can prove the taxpayer omitted income from the return, I'd argue that it could be a lot easier to convince the jury that the omission was willful than it would be to persuade the jury that, say, a deduction taken by the taxpayer was taken with willful intent to evade taxes. I think most members of the average jury pretty much know that when you receive income, it's probably taxable. If you leave income off a return, your own "interpretation" that it's not taxable doesn't leave you much wiggle room if you find yourself facing a jury of taxpayers.

The reason that tax crimes (including willful omission of income cases) are seldom prosecuted is simply lack of resources. The Department of Justice has other priorities, and therefore prosecutes only those cases with (1) a high probability of success, (2) relatively larger amounts of taxes involved, and (3) the possibility of lots of good publicity for the government (e.g., famous people, politicians, etc.) upon conviction (for example, Leona Helmsley or Irwin Schiff). All this is an oversimplification, and I have no data at my fingertips right now to back it up, but this is my sense of how it has worked over the years.

Regarding Borntostorm’s other questions, filing a tax return in full and “simply” not attaching a check (not paying on time) is not a crime -- as long as your failure to timely pay was not willful. If you just didn’t have the money one year, a jury might well conclude the failure to pay wasn’t willful – so maybe the government would be less likely to prosecute. However, if you do that every year – i.e., every April 15th for upteen years in a row, you file a return but you “just don’t have the money” and you do that over and over and over, weellllll.....

Again, if you’re charged criminally, a key issue is going to be whether the prosecutor can persuade the jury (and the key word is “persuade,” not “prove”) that you acted willfully. In American law, “proof” really means “persuasion.” In fact, the ultimate burden of proof is actually called that: the burden of persuasion (e.g., beyond a reasonable doubt, in a criminal case).

Again, I don’t have anything right here at my fingertips to back up these comments at the moment – it’s just my thoughts. Stay tuned. Yours, Famspear 02:48, 19 September 2006 (UTC)

Just from a business analysis, I would say that the IRS rarely brings prosecutions because what it wants is the money. The threat of prosecution is a very effective collection technique, but only if people know they can avoid prosecution by paying up. If the IRS started prosecuting people who paid up promptly after being caught, they would lose a lot of leverage. If the taxpayer is willing to enter into a payment agreement, threat of prosecution is an incentive to comply; actual prosecution would consume the taxpayer's resources and few people can earn a lawful living from jail.

I would also suspect that the most frequent case of unreported-but-documentable income is easily explained as carelessness: the forgotten savings account in another state, the lost 1099 for $52.78, the seasonal job that paid one check in January. There is no reason to prosecute these petty oversights: it may even be overkill to levy a negligence penalty.

My understanding of ten-year statute of limitations on collection is that it stands in lieu of bankrupcty: while the bankruptcy court cannot relieve taxes due the United States, there is little social value in pursuing an indigent taxpayer to the grave. What I am not sure is whether any payment or successful partial collection renews the period. Robert A.West (Talk) 11:02, 19 September 2006 (UTC)

Yes, you can pretty much bet that the government is not going to prosecute someone for evading relatively small amounts in tax. And merely willfully filing returns late, and willfully paying taxes late, while criminal offenses, will USUALLY not result in a prosecution where the taxpayer "voluntarily" comes back into the system and files the returns before the IRS gets really hot on the trail of the taxpayer.

Although it's a bit difficult, some Federal income taxes actually are dischargeable in bankruptcy. I don't think a payment, etc., "renews" the 10 year period. What does happen is that certain events -- like bankruptcy -- can "toll" or "halt" the running of the time period, so that the actual statutory period -- from the date of assessment to the date on which the allowable collection period expires -- ends up being more than 10 years. In other words, as long as the section 362 automatic stay (11 U.S.C. § 362; see Bankruptcy in the United States) is in effect with respect to collection actions against the taxpayer, the running of the statute of limitations is also stopped. Once the taxpayer receives a discharge (or the automatic stay is otherwise lifted with respect to the tax liability), the time period starts running again. Yours, Famspear 16:27, 19 September 2006 (UTC)

[edit] Fifth Amendment

Dear fellow editors: I changed the following passage:

In the United States, persons subject to the Internal Revenue Code who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States, 366 U.S. 213 (1961) as vs. Commissioner v. Wilcox), but they usually do not do so, because doing so would serve as an admission of guilt. Disregarding the Fifth amendment (The U.S. Constitution forbids compulsion of a witness to testify against themself.), suspected lawbreakers, most famously Al Capone, have been charged with tax evasion when there is insufficient evidence to try them for their substantive crimes. By contrast: In the UK law enforcement agencies do not generally have access to tax returns and so immoral or illegal earnings can supposedly be safely declared.

I changed it to read as follows:

In the United States, persons subject to the Internal Revenue Code who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James V. United States but they often do not do so, because doing so could serve as an admission of guilt. Suspected lawbreakers, most famously Al Capone, have been charged with tax evasion when there is insufficient evidence to try them for their non-tax related crimes. By contrast: In the UK law enforcement agencies do not generally have access to tax returns and so immoral or illegal earnings can supposedly be safely declared.

The removed verbiage about the Fifth Amendment, at least in that grammatical form, seemed to convey the implication that charging people with tax crimes when there is insufficient evidence to try them for their "substantive" crimes is somehow "disregarding" the Fifth Amendment (regarding a person's privilege against being compelled to be a witness against himself or herself). That would obviously be incorrect.

Perhaps the language was added to the article to say something different and, if so, maybe a clarification is needed.

I also made a few minor edits such as changing "substantive" to non-tax related." The term "substantive" in the United States conveys a different legal meaning than "non-tax related" and "non-tax related" fits better in this context. Yours, Famspear 02:42, 18 September 2006 (UTC)

I have heard it alleged, and used to take as fact, that there is (or was) a so-called "Capone rule" that since one is required to file a truthful and complete tax return that information on the return is not admissable to prove any crime other than one related to the duty to file (e.g. tax evasion or perjury). While this seems sensible, I can find no evidence of any such rule.

1. Has any defendant raised such an argument in a non-tax prosecution either to exclude the tax form itself, or to exclude other evidence as fruit of the poisonous tree?
2. If so, has it ever been successful?
3. Is it relevant to tax enforcement whether a business is legal or illegal? In other words, is there any case where a taxpayer truthfully reported the amount, but not the character, of his illegal income and was prosecuted for filing a false return?

Just curious. If the answers are known, they might make an interesting paragraph. Robert A.West (Talk) 14:55, 18 September 2006 (UTC)

Dear Robert A. West: There is no such rule. In the Garner case a defendant was convicted of a crime unrelated to Federal taxes, and the prosecution used incriminating information the taxpayer had included on his Federal income tax return. The conviction was upheld. Here's the excerpt from the article on Fifth Amendment to the United States Constitution:

In Garner v. United States, 424 U.S. 648 (1976) the defendant was convicted in connection with a conspiracy to "fix” sporting contests and to transmit illegal bets. During the trial the prosecutor introduced, as evidence, the taxpayer's Federal income tax returns for various years. In one return the taxpayer had showed his occupation to be “professional gambler.” In various returns the taxpayer had reported income from “gambling” or “wagering.” The prosecution used this to help contradict the taxpayer's argument that his involvement was innocent. The taxpayer tried unsuccessfully to keep the prosecutor from introducing the tax returns as evidence, arguing that since the taxpayer was legally required to report the illegal income on the returns, he was being compelled to be a witness against himself. The Supreme Court agreed that he was legally required to report the illegal income on the returns, but ruled that the privilege against self-incrimination still did not apply. The Court stated that "if a witness under compulsion to testify makes disclosures instead of claiming the privilege, the Government has not 'compelled' him to incriminate himself."

Sullivan [a case where the Supreme Court ruled that the Fifth Amendment does not allow a taxpayer to refuse to file a Federal income tax return] and Garner are viewed by some legal scholars as standing, in tandem, for the proposition that on a required Federal income tax return a taxpayer would probably have to report the amount of the illegal income, but might validly claim the privilege by labeling the item "Fifth Amendment" (instead of "illegal gambling income," "illegal drug sales," etc.)

On the separate question of whether there is any case where a taxpayer truthfully reported the amount, but not the character, of his illegal income and was prosecuted for filing a false return -- I'll have to do some digging on that. Off the top of my head I would say that the rule is that you have to be truthful on the return as to the description of the income (not just the amount) OR you have to report the amount with a notation such as "FIFTH AMENDMENT," or some similar notation that makes it clear you are asserting the privilege as to that particular item on the return. If you lie and call it "catalog sales" when it's really "illegal drug sales" then you can technically be convicted of willfully filing a false return -- even if the amount is correct and even if the tax is correct, etc. But I'll have to look and see if there are any actual reported cases. Yours, Famspear 19:16, 18 September 2006 (UTC)

Thanks. I didn't think to look over in the Fifth Amendment article. Robert A.West (Talk) 20:58, 18 September 2006 (UTC)

Dear Robert A West: You're welcome. Also, I did some looking around and found this: A leading case where the taxpayer truthfully reported the amount but lied about the source is United States v. DiVarco, 484 F.2d 670 (7th Cir. 1973), cert. denied, 415 U.S. 916 (1974). In that case, the Court of Appeals for the Seventh Circuit ruled that under 26 U.S.C. § 7206, although the defendants had not understated their income, the SOURCE of the income (about which they had lied on their Federal income tax returns) was a "material matter," and that misstatement of the source of the income was criminal under section 7206. Criminal convictions upheld.

Basically, the concept is that the IRS is entitled to accurate information on the tax return, even if the income (and tax) are properly stated. Source of income is a "material matter." Yours, Famspear 21:18, 18 September 2006 (UTC)

Just as an aside, I have seen a few people argue (I don't recall if it was here in Wikipedia, or somewhere else) that because a particular statute required an individual to provide information (e.g., Federal income tax return) and criminalized the failure to provide that information, or criminalized lying on the report, that somehow the statute would be "unconstitutional" as violating the Fifth Amendment. Obviously that is false. There are gazillions of statutes that require honest reporting to the government, and criminalize willfully filing false information. This does not violate the Fifth Amendment. The key word here is "assert." You have to ASSERT your Fifth Amendment privilege ON THE RETURN OR REPORT ITSELF in order to obtain the legal protection. Those who simply report the truthful information -- thereby failing to assert the privilege -- are not being "compelled" for purposes of the Fifth Amendment (although they are in a sense being compelled for purposes of the underlying criminal statute). If you don't CLAIM the privilege, you have not been "compelled" and you aren't protected. Further, the government is under no legal obligation to tell you this in the instructions for the tax forms, etc. Tricky tricky stuff, eh? Yours, Famspear 21:27, 18 September 2006 (UTC)

I suspect that teachers cause a lot of this, by emphasizing that our rights derive from the Constitution, whereas the Framers thought more in terms of protecting certain pre-existing rights that were especially important or vulnerable. Its a subtle distinction (and Judge Bork would disagree with what I just said), but I think it is important. Thus, some business books attribute the requirement that a non-competition agreement be reasonable to the 13th Amendment. While such agreements could at some extreme constitute indentured servitude, that is not the legal doctrine involved. Similarly, the need to administer the tax laws is obvious, and limited use immunity would seem a natural way to compel truthful and complete answers, so some teacher or writer drew a connection where none existed.

The needs of fiction also tend to create misunderstandings. More than one film has misused "double jeopardy" to create a dramatic situation: X pretends to be dead, and Y is convicted of X's murder. Y gets out of jail and goes after X, immune from threat of prosecution. It makes a good revenge motif, but people tend to assume that what they see in a film is how things are.

Given limited resources, one wonders why the IRS bothered prosecuting in the DiVarco case, since they seem to have gotten the correct amount of tax. And I would suspect that it is unlikely to prosecute any grey area. IIRC, Sydney Biddle Barrows filed business returns under an "Entertainment Services" SIC code, and I have never heard of her being prosecuted for filing a false return. If your hypothetical drug dealer actually owned a catalog sales business and used its premises for his illegal business, would it be a false return simply to include the income? What if it were a pharmacy? Does a physician who writes prescriptions-to-order need to break out that part of his business income? Since criminals are greedy, I imagine the number who report illegal income is few, but it is an interesting thing to think about.

I take it from your phrasing above that there is no reported case of a person's asserting the privilege, neither because the IRS wanted to compel a more specific answer, nor because of a subsequent prosecution that the defendant asserted arose out of asserting the privilege. Robert A.West (Talk) 10:02, 19 September 2006 (UTC)

Well, you raise an interesting question -- basically one of "completeness" of the description of the "source" of the income. How "complete" does your "complete" description have to be to be really "completely complete" for purposes of the statute? I mean, few would argue that the Sydney Biddle Barrows services were "entertainment," so how much MORE detail does she really have to go into? Same question for "drug sales" -- do you really have to say "illegal" drug sales? I don't know.

The answer may be that there is simply no rule. Here's why: The question deals with the "material matter" element of section 7206. The queston of whether the disclosure on a given return is sufficient for purposes of the "material matter" element is probably a question of fact, not a question of law. In a jury trial, questions of fact are decided by the jury, not by the judge. Therefore, there really is no "rule" -- it's a "case by case basis" determination, with each jury making its own determination (or, if the defendant requests a "trial to the bench" -- i.e., with no jury and with the judge acting as the trier of fact -- with each judge making his or her own determination). So, that leaves the taxpayer to ponder the probabilities as he prepares his return.

Is there a reported case of someone's having asserted the privilege? Well, there are several cases of people who have improperly asserted the privilege. For example, some tax protesters refuse to file a return and claim the privilege (that tactic does not work), and others who prepare and sign a form with no information, claiming the privilege as to the entire return (that doesn't work). To properly claim the privilege, you have to claim it as to a specific line or item on the return. I don't recall any cases where people have properly claimed the privilege, but there certainly could be some. Stay tuned. Yours, Famspear 20:46, 20 September 2006 (UTC)

[edit] recent addition re Canada "profitable philanthropy"

I have removed this recent addition to the article:

In Canada, there has been a tradition among the elite to buy the best advice possible to mitigate taxation to it's fullest, leaving the masses to fill the gap with their hard-earned income taxes. Recently, several tax shelter programs have been created by the same minds that offer the elite all their tax free options. Although Canada's Revenue Department is unhappy about these 'schemes' they are not illegal and year after year, tens of thousands of Canadian taxpayers reduce their income tax bill significantly, often to zero.

This is often accomplished through "leveraged charitable gifting" arrangements whereby dollars gifted to charities by the taxpayer are matched or leveraged three to one... the taxpayer is entitled to the charitable receipts for their cash gift AND the leveraged gift, resulting in a net gain as much as 200% of the donation amount. It is also refered to as profitable philanthropy which recent Canadian Supreme Court cases have repeatedly allowed and encouraged. www.smarttaxstrategies.com has more information with which to educate oneself.

This is not expressed in neutral language and was inserted too early in the article. Perhaps the author would care to re-work it and re-insert in a more appropriate place. Paul Beardsell 07:45, 16 December 2006 (UTC)

Dear editors: An anonymous user keeps introducing the materials referenced above with little or none of the revision suggested by editor Psb777 (Paul Beardsell). I have removed the materials again. These materials are unsourced and therefore unverifiable. The verbiage also seems to push a particular point of view and obviously is objectionable in that it contains a blatant advertisement for a commerical web site pushing "more information with which to education oneself". Yours, Famspear 04:46, 18 December 2006 (UTC)

Dear fellow editors: OK, I now see that the material may have originally been inserted on 16 December 2006 at [4] by an anonymous editor at IP 142.161.145.36. Thanks to editor Psb777 (Paul Beardsell) for setting me straight. Yours, Famspear 15:39, 18 December 2006 (UTC)

[edit] Tax protester rhetoric

An anonymous user has repeatedly inserted the following material:

Many individuals, however, argue that the average American worker is not legally obligated to pay a Federal income tax, nor to even file a Federal income tax return, based on existing tax laws, as well as the law as it is described in the United States Constitution as well as how it has been ruled upon by the United States Supreme Court. These individuals state that the obligation of payment of the Federal income tax is done so through voluntary compliance, as is specifically outlined in current tax law and not through mandatory compliance, as implied by the Internal Revenue Service. Further it has been revealed that the Federal income tax exists for the singular and sole purpose of paying the interest which is incurred when the Federal government, instead of printing the money themselves, borrows the money from a private banking cartel, commonly referred to as the Federal Reserve, thus adding significant justification of the efforts of indivuals seeking to avoid payment of federal income tax.

This unsourced material is already covered in part in this article and in the relevant articles on tax protesters. Yours, Famspear 16:22, 14 March 2007 (UTC)

As explained over and over in the related articles, neither the U.S. Supreme Court nor any other Federal court has ever ruled that the average American worker is not legally obligated to pay a Federal income tax, etc. This material is blatantly false.

The statements beginning with "Many individuals, however, argue" and "Further it has been revealed" are also examples of "weasel wording"; they are unsourced. Yours, Famspear 16:25, 14 March 2007 (UTC)

[edit] The distinction in the United States - to be deleted

I have simplified the section "The distinction in the United States" without loss of information. It is now plain that the main thrust of the article and the definitions of evasion and avoidance above this section all show that there is no "distinction" of the position in the US - already the US position is reflected by the article. Accordingly, this section will be deleted imminently. Paul Beardsell 03:19, 3 April 2007 (UTC)