Friday, February 08, 2008

Frivolous Tax Positions: Self-Incrimination

I've recently discussed (here and here) the outcome of the Wesley Snipes tax evasion trial. While most discussion has centered on the jury's split verdict on the criminal charges, the unexamined issue in the case is why Snipes had not paid his taxes in the first place. In the late 90's, Snipes became a tax protester -- someone who believes that Americans simply do not have to pay taxes. At all. Tax protesters have been at it for years, losing every time they go to trial under a wide variety of bizarre theories. (The IRS has helpfully summarized those theories, along with explanations of why each is baseless, in "The Truth About Frivolous Tax Arguments." That document, while not what one could call a ripping good read, is nonetheless good for some laughs.) As baseless as their theories are, David Cay Johnston of the NYT estimates that there are about 1 million people in the United States who believe some version of these theories. (Some of the more prominent believers are, of course, in jail.)

Snipes's particular argument against paying taxes is known as "the 861 position," an argument that is frankly too obtuse -- even by the generous standards of tax protest arguments -- to describe here. In the comments on my Feb. 3 post, though, a regular reader asked about another frivolous tax argument that he had heard about: that filling out a tax form constitutes self-incrimination, because it is signed "under threat of perjury." I offered some thoughts in response on the comment board, but I wanted to follow up today with some further thoughts and clarifications. (These thoughts were inspired in part by Sherry Colb's helpful comment on the same post. Given that Prof. Colb's specialty is criminal procedure, I was relieved to see that my focus on tax law had not made me completely unable to understand other areas of law.)

The 5th Amendment to the United States Constitution says, in pertinent part, that "No person ... shall be compelled in any criminal case to be a witness against himself." Some tax protesters have argued that, when a person signs a tax return "[u]nder penalties of perjury" (which is printed above the line for the taxpayer's signature) they are being forced to violate their right not to be a witness against themselves. Like all tax protester arguments, this claim has been thoroughly and repeatedly rejected by the courts, most importantly in 1927 when the U.S. Supreme Court decided United States v. Sullivan, 274 U.S. 259. The essence of the Court's position is that the requirement to provide information about income, deductions, and so on does compel testimony IN A CRIMINAL CASE. The determination of one's civil tax liability is not a criminal matter, making the 5th amendment irrelevant to the inquiry.

While the civil/criminal distinction is axiomatic, it is certainly true that civil liability can be a precursor to criminal liability. Even so, the courts have rightly held that the requirement to provide accurate information necessary to determine civil tax liability does not implicate the 5th Amendment. To understand this more clearly, it is useful to think about three different ways in which criminal liability can arise from a civil tax proceeding.

First, one can be prosecuted for perjury. As Prof. Colb pointed out, though, perjury means lying; and the government's requirement that you provide accurate information on your tax return is precisely NOT a situation in which the government is compelling you to do something that can result in your criminal prosecution. In fact, if you do what the government tells you to do -- provide accurate information about your income, etc. -- then those statements cannot possibly be used against you in a criminal prosecution for perjury. Indeed, your truthful statements would be an absolute defense against such prosecution.

Second, one can be prosecuted for criminal tax evasion. Here, as in all criminal prosecutions, criminal liability requires proof of a guilty mind, mens rea. The Supreme Court has made clear that a person can only possess the requisite criminal intent in a tax case if they know that their position is baseless. If they "sincerely believe" that they do not owe taxes, then they cannot be found guilty of criminal tax evasion, failure to file, etc. If anything, most tax scholars believe that this standard is too loose (and certainly too easy to fake); but it means that a person cannot go to jail simply because they have not paid their taxes. Possessing such "sincere belief,"
of course, does not mean that one can refuse to pay taxes, only that one is not criminally liable.

Third, one can be prosecuted for engaging in illegal activities (such as drug dealing, prostitution, embezzlement, and so on). Since the income tax is levied on "all income, from whatever source derived," a taxpayer is required to include income earned from illegal activities in their reported income each year. Providing such information, the argument goes, can lead investigators to evidence of illegal activity, which means that income information is at least a link in the chain that leads to criminal prosecution. The Supreme Court's direct response is that this is unusual, that most people do not implicate themselves by reporting their income. Prof. Colb rightly described this argument as unpersuasive
because 5th Amendment inquiries are typically focused on the individual: "[W]ould my answering this question provide a link in a prosecution against me[?]"

It is worth noting, however, that the income tax form does not require specific information about where or how a person earned their income. If you are a drug dealer, for example, you could simply report your income under "wages, salary, tips, etc." Reporting the profits under "business income," or even "other income," which instructs filers to "list type and amount," also need not be revelatory, because the descriptions may be cryptic and non-incriminating (e.g., "wholesale sale of consumer products to retailers"). In other words, the purpose of providing this information is to produce accurate income tax calculations. Indeed, it has been reported that some illegal brothels scrupulously report their income and pay taxes. That most criminals do not do so does not mean that the tax form compels criminal self-incrimination but more likely that someone who is willing to kill a rival drug dealer is unlikely to worry about his tax liability.

Most importantly, this last kind of potential criminal liability arises from non-tax crimes. Making the argument that the tax system compels self-incrimination because it might end up revealing income from illegal sources is quite different from saying that honest, law-abiding citizens could get themselves in trouble simply by complying with civil tax requirements "under threat of perjury."

I'll close this (unusually long) post by endorsing a comment that a reader offered on my first post on the Snipes trial. He summarized the argument well: "When a tax form reads 'under threat of perjury', that's basically the government saying, 'look dude, we're asking for some facts here in this civil transaction. But if you lie, you could face criminal charges, just like you could if you lied on an affidavit (regarding your annual income, for example) during divorce proceedings. If you're indicted, we can't make you testify against yourself on the criminal charges, but we can certainly make you fill out a tax form in the first place within the preceding civil environment.'"

Posted by Neil H. Buchanan


Tam said...

As you pointed out, the cost of tax evasion is high, as it certainly is in Wesley Snipes's case, notwithstanding the absurd media spin on it, and the chance of success is exactly 0% (I was an observer in federal tax court in Manhattan once when a protestor get up in front of the Judge; the Judge almost immediately reamed him out and threatened to throw him in jail for contempt).

Yet, many apparently remain undeterred. If we assume that these people are completely irrational, then I guess efforts at deterrence are futile. But if despite their assertion of these arguments, they are otherwise rational and subject to deterrence, what more can Congress do to deter the assertion of tax protestor positions?

On the one hand, it wouldn't be good to punish a first-time offender who was truly duped by a tax protestor into not paying his taxes. On the other hand, we need somehow to move away from the scienter requirement of fraud crimes which, as the Snipes trial showed, can be difficult to prove.

So similar to defensive driving school for DUI and other traffic law offenders, perhaps Congress can mandate "tax law awareness school" for first-time tax protestors (paid for by penalties imposed on them), after which point that individual can be presumed to know that the arguments employed by tax protestors will not succeed.

Is there any Constitutional problem with that? Any other suggestions?

Neil H. Buchanan said...

Tam makes a very interesting point, and I like the analogy to traffic school. In a way, though, we already have the equivalent of what Tam suggests. Tax protesters are given multiple opportunities to change their positions after being advised by the IRS that they risk jail. No one goes to jail who has simply been duped and would like a do-over now that they understand.

In a recent article, David Cay Johnston mentioned JJ MacNab, who is writing a book on tax protesters and recommended that Congress "define the concept of willfulness so that people who ignore the advice of competent tax professionals in favor of what scam artists tell them cannot claim they seriously believe that the tax laws do not apply to their income." That would work, I think.

It really matters who is running Congress. A major law passed by the Gingrich Congress "prohibit[s] IRS officers and employees from referring to taxpayers as Illegal Tax Protesters ... or any similar designations [because this] may stigmatize taxpayers and cause employee bias in future contacts with these taxpayers." When Congress is more concerned about the stigma of being called a tax protester than about stopping this nonsense, the problem grows. It's good to see things moving in the opposite direction -- though you can be sure that many members of Congress will continue to be inordinately solicitous of this stuff.

egarber said...


Thanks to you and Prof Colb for posting such thorough information on this topic.

Michael C. Dorf said...

I find the "specific intent" requirement for criminal tax evasion interesting. Most crimes only require that the defendant have intentionally committed the act the law forbids, regardless of whether he knew it was a crime. If Peter Perp sincerely believes that killing Victor Victim was legal because VV was "a bad seed who needed a killing," his ignorance of the law (which contains no "bad seed exception" to murder) is no excuse. The requirement of specific intent in the tax context is a concession to the reality that many people we don't want to treat as criminals intend in good faith to take tax positions that are impermissible---e.g., misunderstanding eligibility for deducting home office expenses. That, in turn, is a product of the complexity of the tax code.

JJ said...

I'm the JJ MacNab quoted above.

Under Cheek v. US, the belief that you don't have to pay taxes can be "irrational and unbelievable" and still be considered a good faith defense. For years, juries have been practicing a mild form of nullification by ignoring this "irrational and unbelievable" language and casting their vote in favor of common sense. To paraphrase, "The defendant is obviously hiding his greed behind the [insert stupid detax trick here] argument in order to cheat on his taxes, because no one is actually dumb enough to believe such nonsense."

In the last couple of years, a growing number of juries have ruled of favor of the defendant because they've actually followed the Cheek good faith/willful definition provided in the jury instructions. Since the anti-tax movement is just now starting to break into the mainstream (thanks to the internet, and high profile cases such as Snipes), the number of acquittals will grow quickly.

What I've asked Congress to do is to define willful such that the reasonableness of one's belief would be a factor – in order words, do what juries have already been doing on their own.

For example, I think a jury would find it reasonable that a defendant is confused by home office rules. I think a jury would find it reasonable that a defendant trusted the advice of a lawyer or CPA. I don't think a jury will find it reasonable that the defendant based his beliefs on the advice of a twice convicted felon selling "flag fringe makes you tax free!" binders at seminars held at the local Denny's.

Just a thought.

Neil H. Buchanan said...

Thanks to Ms MacNab for weighing in. I completely agree with your analysis and your policy suggestion. I had not thought about the interesting form of jury nullification that juries have been engaging in -- nullification in favor of the prosecution! -- but that has to be right. The Cheek case, like so much of the Supreme Court's tax jurisprudence, is at best sloppy and at worst negligent. The justices are on record as despising tax cases, and it shows! We have to depend on Congress to fix this.

Dave Rifkin said...

JJ, in discussing Cheek and recent jury trends, stated her belief (above) that "Since the anti-tax movement is just now starting to break into the mainstream (thanks to the internet, and high profile cases such as Snipes), the number of acquittals will grow quickly."

Perhaps the government shares this belief? Note that Mr. Snipes was charged with willful failure to file (violating IRC 7203), a misdemeanor, instead of attempted tax evasion (violating IRC 7201), a felony.

The indictment seems to contain affirmative acts that could have satisfied a Spies evasion case. But the government played it safe on the pure tax (IRC) charges. And in the end, perhaps the jury proved JJ right: the jury only convicted Mr. Snipes on some, not all, of the 7203 charges.