§40-29-110. ATTEMPT TO EVADE OR DEFEAT TAX. (“TAX EVASION”) Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000.00 ($500,000.00 in the case of a corporation), or imprisoned not more than five years, or both.
The Alabama tax evasion law is patterned after a similar statute in the Internal Revenue Code that sets forth the federal tax evasion crime. While the state criminal statute is identical, the state income tax levy is slightly different than the federal income tax. Further, the state rules of evidence and state rules of criminal procedure may be somewhat different than it is for federal law. Also, tax evasion is not just an income tax crime. It applies equally to all state taxes, including sales tax and other business taxes.
There are two categories of tax evasion: the willful attempt to evade or defeat taxes and the willful attempt to evade or defeat the payment of taxes.
The first concerns the ability of the state to ascertain the amount of tax liability. It can be as simple as willfully lying on a tax return or lying to an auditor about the tax computations.
The second category concerns the concealment of the ability to pay taxes or acts to avoid collection. It may involve the simple failure to pay a tax liability coupled with some action to hide or illegally escape collection. The tax liability may already be established by a final assessment; i.e., the equivalent of a circuit court judgment in Alabama. An example is where an individual may attempt to fraudulently convey property into the name of another to evade a tax levy or other collection action.
There must be an affirmative act for the purpose of attempting to evade or defeat “in any manner” either the assessment of a tax or the payment or collection of taxes. Failing to act or failure to do something is not an attempted evasion. It is a different tax crime. For example, failing to file a return, standing alone, is not an attempt to evade; but, failing to file a return coupled with an affirmative act is attempted tax evasion.
Elements of the Crime
To establish a violation of Section 40-29-110, the following elements must be proven beyond a reasonable doubt by the State of Alabama:
- An attempt to evade/defeat a tax or the payment of tax;
- Additional tax due and owing; and
The U.S. Supreme Court has said that “any conduct, the likely effect of which would be to mislead or to conceal” for tax evasion is sufficient to establish an attempt. This is fairly broad. The Court gave some examples:
“keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.”
As with the federal Internal Revenue Code, Alabama income tax law requires all gross income to be reported on state income tax returns unless it is specifically excludable. It makes no difference whether the income is lawfully or unlawfully acquired. Thus, the definition of gross income requires the reporting of all income, including but not limited to: gambling income; illicit drug income, embezzlement income, bribes, kickbacks, extortion, political campaign diversions, corporate diversions, and even bogus loans where there was not an intention to repay.
A Tax Liability Must be Owed
Owing taxes is a critical element of an evasion case. Without a tax deficiency there cannot be a successful tax evasion prosecution. But, the absence of taxes owed does not necessarily mean that a crime has not occurred. For example, a false income tax return may have been filed to obtain a larger income tax refund than would otherwise be due. In that case the crime that will be charged is a felony for filing a false return under penalties of perjury. Tax evasion prosecutions are not assessment or collection cases and it is not necessary to determine or prove the exact amount of the tax that is due and owing. It is enough to prove that the tax cheater attempted to evade a significant amount of tax, even though the actual amount of tax owed may be greater than the amount charged in the criminal case.
The element of willfulness is the most significant element of any tax crime. A great deal of evidentiary proof can be derived from the tax returns or the taxpayers filing history. But, unlike a regular civil tax audit, criminal tax investigations may require the gathering of extensive records and the interviewing of witnesses to ascertain willful intent by a tax cheater. This partially explains why investigations may take much longer than an ordinary civil audit. Also, the burden of proof for a criminal investigation is much more strenuous because the prosecution must offer proof “beyond a reasonable doubt.” This strenuous burden is not necessary in an ordinary civil audit. In a civil audit, the burden of proof is only a “preponderance of the evidence.”
The definition of willfulness in tax cases is fairly simple. It is “a voluntary intentional violation of a known legal duty” according to the U.S. Supreme Court. Proof of evil motive or bad intent is not required. Once the evidence establishes that evading taxes plays any role in a tax cheater’s conduct, willfulness can be inferred from this conduct, even if the conduct also serves a dual purpose such as concealment of another crime or concealment from a spouse or from creditors.
The U. S. Supreme Court furnished excellent guidance on the type of evidence from which willfulness can be inferred. All that is needed is that the “likely effect” of the conduct would be to mislead or conceal. There are many examples of evidence of willful intent. A consistent pattern of understating amounts of income is possibly the most common. Tax cheaters often do not supply an accountant with accurate and complete information. An old technique is to keep two sets of books, one for taxes and one that is for good accounting. Destroying or “losing” books and records may itself be evidence of willful intent although tax cheaters mistakenly think that it makes prosecution impossible. The background and experience of a tax cheater can be considered as bearing on the ability to form willful intent – knowledge. This may be particularly true of professionals like accountants and attorneys who should certainly “know” their tax duty.
Ordinary negligence or a mistake may not prompt a criminal prosecution for tax evasion. But, a deliberate closing of the eyes with a conscious purpose to avoid enlightenment may infer knowledge that is sufficient for proving willful intent.
Statute of Limitations
The criminal statute of limitations within which a criminal prosecution for tax evasion must begin is six years. The general rule is that the limitations period begins to run from the last affirmative act constituting the attempt to evade. The civil statute of limitations within which actions by the state to assesses and collect taxes owed is different. It can be much longer or it can be shorter. If there is evidence of fraud, or in the case of the failure to file a tax return, there may not be any time limitation to assess and collect the taxes owed. Thus, in the event that a criminal prosecution is not possible because of the expiration of the 6 year criminal limitation, the state may still be able to assess and collect the taxes owed.
Corporations and Individual Criminal Liability
Corporations can be prosecuted to the same extent that individuals may be prosecuted. Logically, the punishment of a corporation is limited to a fine. As a matter of policy, the prosecution of the responsible or controlling individual within a corporation is preferred. He/she may be responsible for causing the corporation to evade taxes.
An individual within a company may be criminally responsible if:
- it can be shown that he/she was required to pay taxes on behalf of a corporation or cause the corporation to pay;
- if he/she was an officer or employee of the corporation (or connected or associated with a business in a manner such that he/she was in a decision-making role); and,
- he/she had the authority and duty to assure that the taxes were paid and when.
The test as to who is responsible and who is not ultimately gets down to whom on behalf of the business entity had significant control over the financial decision making process within the business as would give him the power and responsibility to determine who would get paid and who would not. An individual may be a responsible person regardless of whether he does the actual mechanical work of keeping records, preparing returns, or writing checks.
The Alabama Criminal Code states as follows:
“A person is criminally liable for conduct constituting an offense which he performs or causes to be performed in the name of or in behalf of a corporation to the same extent as if such conduct were performed in his own name or behalf.”
Tax evasion is costly to all involved, and the cost of noncompliance, both personally and professionally, far outweighs any chance of personal gain. Convicted individuals face penalties and possible jail terms. Through neglect of their tax responsibilities, those who are guilty of such offenses also erode available funding sources for Alabama’s Education Trust Fund or funding for other important government services.
Note: It is important to distinguish the actions of the state that are civil in nature from those that are criminal. A civil action is a court proceeding to obtain a judgment in a specified amount of money. Collection action can then be instituted to seize assets (garnishment, levy, etc.) for payment of the judgment. An assessment is an administrative proceeding that results in the equivalent of a court judgment. However, a criminal action is a court proceeding to obtain a criminal conviction that will result in a sentence for a jail term and/or a fine. Collection of the taxes owed is not its primary purpose, although the court may order the taxes paid as a condition of sentencing.