Criminal Justice Insider

On September 27, 2020, the New York Times released a bombshell report which indicated that in tax years 2016 and 2017, President Donald Trump paid a combined $1,500 in federal income tax. In ten of the past fifteen years, he apparently paid no federal income tax whatsoever. Given his repeated proclamations of his vast wealth and success, one could imagine that President Trump’s conduct with regard to his taxes may have criminal implications. In fact, in a rare public disclosure regarding an ongoing grand jury investigation, the New York County District Attorney’s Office has stated it is investigating potential tax fraud. This post provides an overview of what is involved in proving a potential tax crime.

Author’s note: We have not reviewed the President’s tax returns, which are not publicly available. This post is not intended to express an opinion on the accuracy of the returns, the information contained thereon or the legitimacy of tax deductions taken by the President. Nor is it intended to express an opinion on whether the President can be indicted while in office or whether he should ultimately be indicted. This post is simply to highlight what is involved in proving a potential tax crime.

The most common type of tax crime, and the one most likely applicable to the President is tax evasion pursuant to 26 U.S.C. Sec. 7201. Tax evasion takes two forms. The first is the filing of a false return that either omits income and/or claims deductions to which the taxpayer is not entitled. The other is the failure to pay tax that is due and owing as established either on the return or through an audit. There is no allegation that the President failed to pay the $1,500 in federal tax income that he has claimed to owe for tax years 2016 and 2017. Any tax evasion charge would likely entail the former type of tax evasion rather than the latter.

Tax evasion by filing a false return requires the Government to prove an attempt to evade or defeat the payment of a tax that is due and owing as well as showing “willfulness” in that conduct. The attempt must consist of an affirmative act, such as filing a false return, in which the taxpayer engaged for the purpose of evading their tax obligations. A mere omission is not enough to support tax evasion without additional conduct such as keeping two sets of books, destroying records or concealing income.

Additionally, the Government must prove that some amount of additional tax is due and owing. In proving this element, the Government must demonstrate that, using the same accounting method employed by the taxpayer, the return was false such that there is, in fact, a substantial deficiency in the years at issue. See United States v. Marcus, 401 F.2d 563 (2d Cir. 1968). If an accurate return would result in no additional or otherwise insignificant tax liability, charges for tax evasion will not lie.

The final element of a tax evasion charge, willfulness, is the voluntary, intentional violation of the known legal duty to accurately report one’s income on a tax return. See Cheek v. United States, 498 U.S. 192 (1991). Willfulness is rarely proven directly. Instead, it can be inferred through conduct such as consistently understating income in consecutive years, destroying books and records, and failing to provide one’s accountant with accurate records.

Willfulness is generally the rub of tax evasion cases, and this requirement may be why criminal tax charges are rarely brought. The standard for willfulness is a subjective one. So long as the defendant has a good faith belief that he or she is not violating the tax law that can be a defense to a tax crime prosecution. Further, where the tax laws and policies are vague or unsettled, courts have found that the defendant has lacked willfulness in evading their tax obligations. See e.g. United States v. Heller, 830 F.2d 150 (11^th Cir. 1987).

With regard to the President, his tax returns seem exceedingly complicated given his labyrinth corporate holdings. This could make proving the “tax due and owing” element exceedingly difficult for the Government. The Government will have to conduct a full autopsy of the President’s returns.

It is readily apparent that the President took very aggressive deductions including $70,000 for personal care and travel and the payment hundreds of thousands of dollars in consulting fees to himself and family members. If these deductions have an arguable basis in law and can be taken in good faith, the Government will have a difficult time proving “willfulness.”

While the President’s tax payment seem distasteful, they are not obviously criminal. Accordingly, they provide a useful lens with which to view the difficulties in prosecuting criminal tax cases.

For more information on the topic discussed, contact:

• Adam M. Felsenstein  |  felsenstein@thsh.com  |  212-508-7533