The Willfulness Element of Tax Crimes (9/27/11)

A commenter to one of my other blog entries mentioned the excellent article in today's Wall Street Journal - Gary Fields and John R. Emshwiller, As Federal Crime List Grows, Threshold of Guilt Declines (WSJ 9/27/11), here. The article is a good introduction for afficioinados to the range of general criminal intent requirements:

For centuries, a bedrock principle of criminal law has held that people must know they are doing something wrong before they can be found guilty. The concept is known as mens rea, Latin for a "guilty mind."

This legal protection is now being eroded as the U.S. federal criminal code dramatically swells. In recent decades, Congress has repeatedly crafted laws that weaken or disregard the notion of criminal intent. Today not only are there thousands more criminal laws than before, but it is easier to fall afoul of them.

As a result, what once might have been considered simply a mistake is now sometimes punishable by jail time.

* * * *

Over time, lawmakers have devised a sliding scale for different crimes. For instance, a "willful" violation is among the toughest to prove.

Requiring the government to prove a willful violation is "a big protection for all of us," says Andrew Weissmann, a New York attorney who for a time ran the Justice Department's criminal investigation of Enron Corp. Generally speaking in criminal law, he says, willful means "you have the specific intent to violate the law."

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Burden of Proof for Willfulness in FBAR Violations (9/6/11)

A key issue in considering the FBAR willfulness penalty is the standard standard of proof if the Government pursues the FBAR penalty. The Government is required to pursue the FBAR penalty by filing a suit and, if successful, obtaining judgment, rather than through the panoply of collection devices for tax assessments.

In United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010), previously discussed here, the court said that it was applying a preponderance of the evidence standard but it is clear that it held the Government to a fairly strict standard of proof. For burden of proof afficionados, I should state that historically in Anglo-American jurisprudence, a party alleging fraud must prove the fraud at a higher level than preponderance of the evidence. See generally Grogan v. Garner, 498 U.S. 279 (1991) (applying, however, preponderance of evidence for fraud exception to bankruptcy discharge because of the nature and context of that exception). For example, if the IRS asserts the civil fraud penalty under § 6663, the Code only says that the burden of proof is on the IRS (§ 7454(a)) but the Code is silent as to whether the burden is preponderance of the evidence or clear and convincing. But the law is clear that the IRS must prove fraud by clear and convincing evidence. See T.C. Rule 142(b); John Gamino, Tax Controversy Overburdened: A Critique of Heightened Standards of Proof, 59 Tax Law. 497, ___ n. 38 (2006) (“Tax Court Rule 142(b) echoes the statutory language but specifies the clear and convincing standard by which the government must carry its burden. While not technically controlling in other courts, Rule 142(b) is representative of the broadly prevailing rule.”). The clear and convincing burden is conceptualized as heavier than preponderance (the normal civil burden) and lighter than beyond a reasonable doubt (the criminal burden).
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Can I Just Pay and Make the Investigation / Prosecution Go Away?

Criminal tax practitioners often are asked early in the representation (and often more than once) whether, if the client under investigation or being prosecuted, simply pays the tax involved -- even with interest and penalties -- will the problem simply go away. The answer that I give to this is no. (Actually, depending upon the facts and if it is early on in the investigation, the answer may be more nuanced than an outright unequivocal no, as I note later in the blog) As I have sometimes explained after giving the answer no, the investigating agent or prosecutor really does not care whether the taxes are ever paid; he or she wants a conviction.

In United States v. Quinn (D. Kansas 2/3/11), the defendant tried to make the case go away by paying the tax. The defendant was prosecuted under § 7202 Willful failure to collect or pay over tax, the criminal analog to the civil trust fund recovery penalty, § 6672. Failure to collect and pay over tax, or attempt to evade or defeat tax (sometimes called the responsible person penalty). After being indicted, the defendant paid the amount for which she was charged and moved to dismiss. The district court denied the motion to dismiss.
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Willfulness - Non Tax Contexts

I have written on the willfulness element for most federal tax crimes previously. Yesterday, I read on the White Collar Crime Prof blog here a discussion of a recent Second Circuit case, United States v. Kaiser, ___ F.3d ___ (2d Cir. 2010), discussing the willfulness requirement a securities crime. Willfulness of course means different things in different criminal statutes (see the excerpts from my Federal Tax Crimes book here). Perhaps I confuse more than I help for readers of this blog, but I will provide a few comments on Kaiser.

The fight on appeal was whether the securities crime with a willfulness element required that the Government prove that the defendant knew his conduct was illegal or just that the Government prove that the defendant knew the conduct was wrongful. A person generally knows when he tells a lie that it is wrongful (I set aside the philosophical debate as to whether a lie is always wrongful); what he or she may not know in the specific context is whether the law describes that wrongful conduct (the lie) as a crime. Bottom-line, the court held that the Government need only prove that the defendant know that the conduct -- the lie -- is wrongful. The court summarized its holding:

[W]e conclude that [the prior cases] do not require a showing that a defendant had awareness of the general unlawfulness of his conduct, but rather, that he had an awareness of the general wrongfulness of his conduct.

The opinion is more nuanced than that, so I refer you to it.

One of the interesting points in the decision is the discussion of a specific wrinkle in the securities law is Section 78ff(a) which says: "[N]o person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." So pronounced the court, this does not mean that, in order to convict, the Government must prove knowledge of illegality; it just means that the convicted defendant cannot be imprisoned unless he knew of the illegality. The court talked about this as a "defense" to incarceration, but presumably in a criminal case, the Government must prove the key fact (knowledge of illegality) beyond a reasonable doubt.  I found this wrinkle odd, but securities law is not my area of practice.  But, as suggested by the excerpts from my book, this additional required element for imprisonment seems to be incorporated in the willfulness element for tax crimes.  (I do caution that there may be some continuing uncertainty about the level of knowledge of the illegality, such as does the defendant really have to know the specific law he is violating?)

The Second Circuit's decision also has a good, succinct discussion of Second Circuit law on the conscious avoidance instruction. (For my earlier blog comments on this instruction, see here.)