Chapter 36

Tax Fraud: Criminal Cases

Edward M. Robbins Jr.

36.1 Avoidance versus Evasion and Civil versus Criminal

Since the earliest days of the Internal Revenue Code (IRC) almost 90 years ago, the government and taxpayers have waged an ongoing battle over the assessment and collection of taxes. When courts began refereeing this fight, the terms tax avoidance and tax evasion emerged. Tax avoidance results in routine civil adjustments, if any, to the taxpayer's tax returns. Tax evasion issues can lead to civil and/or criminal tax fraud proceedings, which often result in a jail sentence or significant civil fraud penalties, or both.

Tax avoidance generally describes legally permissible conduct, whereas tax evasion connotes intentionally fraudulent designs. A classic description of tax avoidance was penned by Judge Learned Hand:

Anyone may arrange his affairs that his taxes shall be as low as possible. He is not bound to choose the pattern which best pays the Treasury, there is not even a patriotic duty to increase one's taxes. Over and over again courts have said that there is nothing sinister in so arranging [one's] affairs. . . . Everyone does it, rich and poor alike, and all do right, for nobody owes a public duty to pay more than the law demands.1

In more recent years, the Internal Revenue Manual (IRM) itself has observed the “fine distinction” between tax avoidance and evasion and concedes that “any attempt to reduce, avoid, minimize or alleviate taxes by legitimate means ...

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