DISTINGUISHING BETWEEN TAX AVOIDANCE AND TAX EVASION by JERRY PAUL PEIRCE, B.B.A.
A THESIS IN ACCOUNTING
Submitted to the Graduate Faculty of Texas Technological College in Partial Fulfillment of the Requirements for the Degree of MASTER OP SCIENCE IN ACCOUNTING
August, 1968 . so
No. l(o4
ACKNOWLEDGMENTS
I would like to thank the Accounting faculty of Texas Technological College, for they have so unselfishly shared their time and knowledge with me. I am indebted- to Professor Reginald Rushing for his direction in this thesis.
ii TABLE OF CONTENTS
ACKNOULEDGHENTS ii I. INTRODUCTION 1 Scope and Limitations 1 Definitions 2 The Problem / . ^ Origin of the Tax System 5 The Legislative Process 8 II. REPORT OP T?rE STUDY 10 Tax Avoidance and Tax Evasion 10 DraTiing a Finer Line 1^ The Section 7201 Violation 15 The Three Elements of Tax Evasion 17 The Role of the Accountant 23 The Role of the Government -29 III. CONCLUSION 37 Suram^.ry .' 37 Reconnendation 39 BIBLICGRiVPHY 45 TABLE OF CASES 1^7 APPENDIX l\8
ill CHAPTER I
INTRODUCTION
The field of Federal taxation is perhaps the most chal lenging and controversial aspect of the democratic process. After subjective examination, the layman readily explains why Federal taxes should be reduced. The most sophisticated tax practitioner will explain that he is not avrare of all the complex methods for reducing taxes and that a substantial portion of his tax practice is composed of individuals who would like to pay less Federal income tax. It is a generally accepted fact that most taxpayers would like to be able to pay less tax and yet maintain all the benefits of the demo cratic process.
Scope and Limitations Pay less and enjoy the same benefits: this idea V7ill be developed for the individual taxpayer by taking into con sideration the position of the Internal Revenue Service and that of the tax practitioner. The prevailing premise is that each taxpayer is entitled to pay as small an amount of taxes as the law allows but is never entitled to a tax re duction resulting from an illegal method. Tax cases, tax services, the Internal Revenue Code of 195:-^.» Income Tax Regu lations, periodicals, and recently published books will be used to explore the area of tax avoidance and evasion. 1 The approach to the writing of this thesis is perhaps different than the manner which others have used; it is dif ferent primarily from the standpoint that it does not deal . with specific fact circumstances. The idea of this thesis is to discuss the components which make tax evasion, the manner and methods in which the investigative process on the part of the Special Agent is conducted, as vrell as the ex tent to which the tax practitioner can participate in tax planning. With an understanding of the above, one has the tools for taking any fact circumstance and detei*mining if it possesses the necessary elements of tax evasion. If it does not fall within the category of tax evasion, it must inevi tably fall within the area of tax avoidance or legislative tax guidelines.
Definitions Cert, denied. Certiorari denied is the refusal by the Supreme Court to review the records and/or holdings of an inferior court. Code. Code refers to the Internal Revenue Code of 19 5^. an act which revised the income tax laws of the United States. Fifth Amendment to the Constitution. Any person accused of a crime may not be compelled to make any statement, answer any question, or present any evidence which iiay tend to be incriminating. Fraud, The term is used synonymously with tax evasion. See Tax Evasion below. Loophole. The term implies a legal passage used to escape the strict interpretation of the Code of Federal Repcula- tions. It is completely legal by definition of the law but follows an interpretation other than that desired by the Internal Revenue Service. Regulations, Code of Federal Retaliations. "These Regula tions are susceptible to challenge. In dealing with the Treasury Department, they have the * force and effect of law,» but the courts are not bound by them. Neither is the taxpayer bound in contesting a deficiency before the Tax Court or in suing on a refund claim if he wishes to challenge their validity," Special Agent. An investigating agent for the Intelligence Division of the Internal Revenue Service is knovm as a Special Agent. Tax Avoidance. Tax avoidance connotes a method of reducing one*s taxes by following a strict interpretation of the wording, of the law rather than the interpretation sug gested by the Internal Revenue Sei*vice. Tax Evasion. By definition, tax evasion is the reduction
Fred W, Norwood and Sam VJ. Chisholm, Federal Ino0!n3 Taxes; Research and Planning (Englevjood Cliffs, N,J. : FrenFice-Hali, inc.,T9"62l, p. 15. of taxes by a method contrary to that allov^ed by the law. Tax reduction by legislative process. A method of deter mining one's taxes by adhering to the Federa.l Code of Retaliations refers to tax reduction by legislative process.
The Problem The problem evolves from a lack of understanding of the basic elements which when combined result in either tax avoidance or tax evasion. To what extent is the taxpayer able to alter the fact situation before he has engaged in tax evasion? To what degree of meticulousness is an accoun tant able to plan a tax situation? To what extent should a taxpayer discuss his tax matters when intervievxed by Special Agents? It may be discerned that there are many problems associated with distinguishing between tax avoidance and evasion. For this reason, this paper has been restricted to the problems relating to individual taxpayers and to the one criminal viol8.tion, tax evasion. Too often the problem is only considered lightly. Too often the taxpayer does not take seriously enough his Fed eral tax obligation. This lack of respect for the strictness of the law has resulted in much anxiety for those who have dodged their obligation; and frequently, a taxpayer who has failed in his obligation speaks freely when confronted by the investigative agency because he does not fully understand the severity of the situation. Equally important is the fact that it is not uncommon for taxpayers to pay a larger tax liability than the law re quires. For this reason, there is a need for a better under standing of the obligations of the taxpayer to minimize his tax burden by a legal method. This problem, the lack of understanding of the basic elements, can be related to most other tax problems. The solution may be found after one has acquired a complete knowledge of the legal requirements as they apply to the facts and circumstances in question.
Orip:in of the Tax System Two articles of the Constitution provide the authority and restriction of taxation: Article I, section 8. The Congress shall have Power to lay and collect Taxes, Duties, Imposts,'and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States. , , , Using Article I, section 8 as the authority. Congress enacted the Federal income tax act of l86l to finance the Civil VJar. Follovzing the Civil War, this act was not reenacted. In 189^, however. Congress enacted a law providing for an income tax. This act was quickly challenged-^ by the restrictions of
2 U.S., Constitution. Art. I, sec. 8. -^Pollock V. Farmers Loan and Trust Co., 157 U.S. 429, 15 S. Ct7^73 rib95). Article I, section 2, clause 3- Representatives and direct taxes shall be ap portioned among the several States which may be included within this Union, according to their respective Numbers, V7hich shall be deteirmined by adding to the whole Number of free Persons . . . three-fifths of all other persons.^ In the Pollock case, the taxpayer explained that a directly imposed tax on bonds, real estate, and stocks vrould be a "direct" tax and could only be imposed if apportioned among the several States according to their respective popu lation. It was argued that to tax the income from a capital Investment was the same as taxing the underlying capital and, consequently, it was a direct tax that should be apportioned according to population. Pollock further explained that an income tax could not contain an apportionment formula. Sub sequently, the Supreme Court declared the act unconstitu tional. On July 12, 1909, the Sixteenth Amendment to the Con stitution vras passed to solve the problems described in the Pollock case. This amendment was ratified by the States in 1913 and read as follows: - The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regards to any consensus or enumera tion, 5
4^•S. , Constitution. Art. I, sec. 2, clause 3. U.S., Constitution. Amendment XVI. The constitutionality of this amendment was challenged, and the Supreme Court explained the limited purpose for which this constitutional amendment was required: Indeed, in the light of the history which we have given and of the decision in the Pollock Case, and the ground upon which the ruling in that case was based there is no escape from the conclusion that the Amendment was drawn for the purpose of doing away for the future with the principle upon which the Pollock Case was de cided. . . ,° With the Sixteenth Amendment fiiTnly implemented, income taxation had its beginning. From 1913 to 1939, fourteen (l4) revenue acts were passed.'^ Each act nullified the prior act and contained revisions as V7ell as the provisions of the old acts that were carried forward. One can imagine the diffi culty a tax practitioner must have had in trying to stay informed. The Internal Revenue Code of 1939 ^'^as adopted with the idea that it could be changed or revised by chang ing the particular section concerned. From 1939 to 1953» there were twenty-one major
^Brushabsr v. Union Pacific R.R. Co., 240 U.S. 1, 36 s. ct. 23TI19TST; n Tariff Act of 1913» Revenue Act of I916, Revenue Act of 1917, Revenue Act of 1918, Revenue Act of 1921, Revenue Act of 1924, Revenue Act of 1926, Revenue Act of 1928, Reve nue Act of 1932, National Industrial Recovery Act of 1933, Revenue Act of 193^, Revenue Act of 19351 Revenue Act of 1937, and Revenue Act of 1938. 8 o amendments to the 1939 Code. The 195^ Code was adopted with the idea of Improving the quality of draftsmanship. It is of interest to note that all tax disputes originate with the interpretation of the Internal Revenue Code. The Legislative Process Article I, section 7, clause 1 of the Constitution re lates as follows: "All Bills for raising Revenue shall orig inate in the House of Representatives; but the Senate may 9 propose or concur with Amendments as on other Bills." The Committee on Ways and Means of the House of Repre sentatives is the sounding board of initial fonnal presenta tion of ideas. These ideas can flow from the President, House members. Senate members, or the Treasury at the public hearings held by this Committee. Following the public hear ings,- the House Committee begins the executive session from which the public is excluded. Here the bills are molded and later presented to the House members. At the time of
o The Public Salary Tax Act of 1939, Revenue Act of 1939, First Rex^enue Act of 19^0, Second Revenue Act of 19^0, Excess Profits Tax Amendments of 19^1, Revenue Act of 19^-f'l, Revenue Act of 1942, Current Tax Payment Act of 19^3, Revenue Act of 1943, Individual Income Tax Act of 19^^, Tax Adjustment Act of 1945, Revenue Act of 19^5, Revenue Act of 19^8, Tax Ad ministration Act of 19^9, Technical Changes Act of 19^9, Revenue Act of 1950, Excess Profits Tax Act of 1950, Revenue Act of 1951, Reorganization Plan No. 1 of 1952, Technical Changes Act of 1953, Excise Tax Reduction Act of 195^. 9 U,S. , Cpn,sJ_itjation, Art. I, sec. 7, clause 1. presentation, a formal report is prepared for publication which contains justifications for the bill and a simplified version of the technical language contained in the bill. The bill is debated on the floor of the House normally in a "closed rule"-^ capacity. After approval by the House, the bill is sent to the Senate where it is referred to the Senate Finance Committee. This Committee has the authority to hold public hearings followed by executive sessions. The bill is introduced to the Senate concurrently with a pub lished explanation. The Senate does not follow the "closed rule" procedure, and all debate is recorded in the Congres- sional Record. If the Senate adopts the bill, it is referred to the Conference Committee composed of ranking menbers of the Sena.te and. House committees. The Conference Committee compromises the differences and publishes an explanation, Nox-mally, the House and Senate accept the compromised ver sion, and the bill is sent to the President for his signa ture.
Amenclnents to the bill a'ly be recommended only by i:lia members of the Ways and Mc^^ms Coni-iiittee. The 1954 Code 'uas adopted by such a manner. CHAPTER II
REPORT OF THE STUDY
Tax Avoidance and Tax Evasion The system of Federal taxation is designed for volun tary compliance. The taxpayer determines the amount of tax liability, if any, and then files a return. The Federal Government follows the assumption that all tax returns are accurate until facts disclose othervrise. Congress knows that a system of voluntary compliance is best for the majority of the taxpayers; and for this reason, it is best for a democratic system. However, there will always be those people who inadvertently neglect to pay their equitable portion and those who by some devious means knowingly refuse to comply with the voluntary system. For those taxpayers who inadvertently neglect to pay their share of the Federal taxes, the Goverriment computes the correct amount of tax as well as six percent {6^) in terest on the deficiency and allows the taxpayer the oppor tunity to comply with the voluntary system. This taxpayer has engaged in neither tax evasion nor tax avoidance; an honest mistake has been made. The taxpayer who knovfingly and willfully reduces or eliminates his taxes by using a
•^H9.11e V. Commissioner^ 175 F.2d 500, 38 APTR 91 (2d Cir, 19^-9). 10 11 fraudulent means has committed tax evasion, and he will be required to face the criminal sanctions of the Internal Revenue Code and then the resulting civil aspects of the case. After the criminal and civil fraud aspects have been resolved, he will be required to recompute his tax on the correct taxable income and meet the test of voluntary com pliance. From this, one can definitely infer that nondis closure or false disclosure on the part of a taxpayer is met with severe penalties in the form of monetary fines and/or 2 prison sentences. Perhaps this point was best said in the case of Spies v. United States: The penalties imposed by Congress to enforce the tax lax-js embrace both civil and criminal sanctions. The foi^er consist of additions to the tax upon determinations of fact by the ad ministrative agency and with no burden on the Government to prove its case beyond a reasonable doubt. The latter consist of penal offenses enforced by the criminal processes in the famil iar manner. Invocation- of one does not exclude resort to the other.3 To this point, nothing has been mentioned about the reduction and/or elimination of taxes by a lawful means, known as tax avoidance. This area is particularly inter esting and is limited only by the knowledge and creativeness
2 Robert Milton Schmidt. Leg-al and Aceounting:^_Handbook of Federal Tax Fraud (Englewood Cliffs, N.J,: Prentice-Hall, Inc., 19^377 ^Spies V. United States, 317 U.S. 492, 63 S. Ct. 36^ . . ^ Mil II ii« I mi I •II——ml Milium • I —
Bullen V. Wisconsin. 240 U.S. 625, 630. ^Marshall v. Commissioner. 57 P.2d 633, 63^^ (6th Cir. 1932), Sawtell V, Commissioner, 82 F.2d 221, 222 (1st Cir. 1936). "^Hel-vering; v. Grea:ory. 293 U.S. 465, 469 (1935). o standard Oil Co, v. United States. 130 F.SuT^p. 821 (Ct, CI. 19"55T7^ 13 however, this line of reasoning is far from being true. Tax avoidance may best be described as an evolu tionary process inherent in our system of tax leg islation and administration. Tax laws are enacted, loopholes appear in them, taxpayers employ them, nexi tax laws are enacted to plug the loopholes, and these laws give rise to new loopholes which generate and give momentum to the never ending cycle.9 The problem exists in being able to dravr the line between points that do not form a straight line. The ingenuous rea soning of man can squeeze through some seemingly impenetrable loopholes. The Internal Revenue Service has an Intelligence Division whose job it is to show, when the facts warrant, that the taxpayer has not squeezed through a loophole but instead that the taxpayer has crossed the line and evaded his taxes. The problem is so tightly vroven that at times the courts have used the terms "avoidance" and "evasion" as synonyms. ... a transaction, otherwise within an exception of the tax law, does not lose its immunity because it is actuated by a desire to avoid, or if one chose, to evade, taxation.-^^ The problem is so challenging that some tax practitioners will not even attempt to avoid taxes by means of tax avoid ance loopholes for fear of ending up in the courtroom. Other practitioners feel that tax avoidance is an area that is
^Sydney A, Gutkin and David Beck, Tax_AYoidange_ vs. Tax Evasion (New York: Ronald Press Company, 1958), p. 10. 10,Helverin^o ; v. Gregory, 69 F.2d 809, 810 (2nd Cir. 193^). 1^ separate and apart from the normal business transaction and, therefore, bordering on the edge of and concerning improper ethics and immorality.
The third method of reducing taxes is by the legislative process. This method does not approach tax avoidance and avoids existing tax loopholes that may be closed next year. This legislative method is most popular among the large mass- production tax return preparers that do not want to take the time for nor run the risk involved by an audit by the In ternal Revenue Service.
Drawino; a Finer Line In drawing the line betvreen tax avoidance and tax eva sion, one must be able to verbalize the surreptitious manip ulation of those who seek to evade taxes. Evasion has a manner that sets it apart from the legal loopholes of avoid ance. The tax evader must alter the" facts and attempt to hide the exposing evidence; one who practices tax avoidance can openly discuss his use of leg-al process and study the possibilities of opening a new loophole while waiting for the current legal loophole to be closed by legislation. To dravT the legal line requires patient consideration of the particular facts and circumstances. One cannot gen eralize and form a conclusion; he must draw the line irre- gardless of the infinitesimal range between avoidance and 15 evasion. Perhaps this was best stated by Mr, Justice Holmes in Bullen v, Vli scons in:
We do not speak of evasion, because, when the law draws a line, a case is on one side of it or the other, and if on the safe side is none the worse legally that [sic] a party has availed him self to the. full of what the law permits. When an act is condemned as an evasion vxhat is meant is that it is on the wrong side of the line indi cated by the policy if not by the mere letter of the law,11
The question that must be answered is this: Has the taxpayer stayed within the framework of the law? If so, he has achieved the desired results by lawful expedients; however, if an illegal method has been employed, the entire result is tainted and unlawful. This constitutes tax evasion, ... if there is evasion, there will be sub terfuge, camouflage, concealment, some attempt to color obscure events, or to ms^ke things seem other than they are. Once the event is determined, the only question left is one of law.12
The Section 7201 Violation Code section 7201 of the Internal Revenue Code of 195^ covers tax evasion and reads as follows: Any person vrho willfully attempts in any manner to evade or defeat any tax imposed hj this title or the payment thereof shall, in addition to other
•^•^Bullen V. Wisconsin, 240 U.S. 625 (I916). 12 Randolph Paul, Studies in Federal Ta_xation (Cambridge, Mass.: Harvard University Press, 1937), P. 13. 16
•penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.13
This section is all-inclusive and has far-reaching impact. It includes the evasion of another*s tax as well as the evasion of one^s ot-rn taxes. The wording of this section has changed little since 1924 when this violation was changed from a misdemeanor to a felony. It is understandable why this section was written in an all-inclusive manner, since the ways of evading taxes are limited only by the extent to which one wishes to com plicate a circumstance. The tax evader can understate the income, overstate the expenses, or overstate the personal exemptions. The simplicity of the three methods is not often evident until one recognizes the multitude of ex penses, potential sources of income, and possibilities in claiming unwarranted dependency exemptions. This section was enacted to assure the taxpayer that the Government frowns on tax evasion, and it is often said that "Section 7201 puts the teeth in the laTr. " It is not required that there be any particular rela tionship between the taxpayer and the person prosecuted as long as the one v:ho is accused actually did attempt to evade
"^"^IBJIPI^IL^I ^""^-'^-mi^.^^- otJL25''. I'^rch, 1964 Eiitio'-i (Engl evTood "Cliffs,' N.J. : Prclitice^Sall, Inc., 19-^). 17 taxes. An accountant or attorney participating in the f2?aud by preparing false returns for the taxpayer is subject to prosecution but not to payment of the tax. In addition, persons who have knovringly "contributed" to furthering tax evasion by a taxpayer may become "principals in the common enterprise" under the aider and abetter statute.•'•^ Those persons who have attempted tax evasion all become equal under the law irregardless of the position of "leadership and subordination among themselves. "
The Three Elements of Tax Evasion
Attempt There must be an "attempt" to defeat or evade the tax. The landmark case which expounds at defining attempt was handed dox-m by the Supreme Court in 19^3. It is not necessary to involve this subject with the complexities of the common law "attempt."
•^Sinkoff V. United States, 86 F. 2d 868, 878, 18 AFTR (^77 (7tF'^Ci?7T93^77"7ert. denied, 301 U.S. 689 (1937), the court said, "Nor is it any defect that the tax attempted to be evaded was that of another. The statute is so framed as to make liable any person who attempts willfully and unlaw fully to evade the tax of himself or of any other person." Certified Public Accountants have been convicted for attempt ing to evade the taxes of another person where they had knowledge of and participated in the deduction of personal expenses of a corporate officer as business expenses. Unit^ed, States V. Brill. 27O F.2d 525r ^ AFTR 2d 5550 (3d Cir. 1959). ^^U.S.C, sec. 2. United States v, Johnson, 319 U.S. 503, 30 AFTR 1295 (19^3). •'•^Unijbed State_5_v,.._Johnson, 319 U.S. 503, 30 AFTR 1295 (19^-3). 18 The attempt made criminal by this statute does not consist of conduct that would culminate in a more serious crime but for some impossibility of completion or interruption or fioistration. This is an independent crime, complete in its most serious form when the attempt is complete and nothing is added to its criminality by success or consummation, as would be the case, say, of at tempted murder. Although the attempt succeeds in evading "tax, there is no criminal offense of that kind, and the prosecution can be only for the attempt. We think that in employing the termi nology of attempt to embrace the gravest of of fenses against the revenue Congress intended some willful commission in addition to the willful omis sions that make up the list of misdemeanors. VJill- ful but passive neglect of the statutory duty may constitute the lesser offense " [failure to file a return] , " but to coiabine with it a xvillful and positive attempt to evade tax in any manner or to defect it by any means lifts the offense to the degree of felony,17 This case, in distinguishing between "willful but passive neglect" and willful attempt to evade, set the precedence that is still follo^Jed today. Congress was viell aware that when the Inteinr*l Revenue Service discovers the attempt, it can proceed to recover the tax; and consequently, the "perfect crime" never comes to the attention of the Service. Therefore, the word "attenpt" must be used to convey the message. Spies v. United States also explained that for a Section 7201 conviction, the at tempt must carry ^/iith it the connotation of an affirmative act. This act ici}?.j te.ke the foru of keeping a double set of boolis, alteri/ig invoices, co^.-erlng assets, hiding eources of
^"^SDICS V. United States. ?P"
19 income, or any other method which misleads or conceals in the -1 o motive of tax evasion."^ One should keep in mind the ulti mate objective is the filing of the return or the date at which the return is due. At this time, the attempt is com mitted; and the criminal statute of limitations begins.^
Willfulness The intent of the party is perhaps the most difficult element to prove when charges are brought against the tax payer. Section 7201 is explicit in stating, "Any person who willfully attempts. ..." The taxpayer must be aware of and know that tax evasion is the motive when he commits the offense. Willfulness is . . .a state of mind of the taxpayer wherein he is fully aware of the exis tence of a tax obligation to the government which he seeks to conceal. A willful evasion of tax requires an intentional act or omission as com pared to an accidental or inadvertent one. It also requires a specific vrrongful intent to con ceal an obligation known to exist, as compared to a genuine misunderstanding of what the law requires or a bona fide belief that certain re ceipts are not taxable. A conviction cannot be sustained unless this state of mind is supported by the evidence and explained to the jury.^^
•'•^SplQS V,„ U;CLlj^^d.,State^. •^^United States v. Stoehr, 100 P. Supp. l43, ^1 AFTR (^7 (3rd"nr. 1951), cert, denied, ?n United States v. Martell. 199 F.2d 67O, 672, 42 AFTR 757 rSrd Cir. 195277"cert, denied, 3^5 U.S. 917 (1953). 20 The question is often asked, "How does one prove will fulness?" It is not necessary that willfulness be proved by direct evidence,^^ such as the defendant admitting he has done certain things with the purpose of defeating or evading his income tax. Willfulness is, therefore, usually decided from circumstantial evidence that establishes a distinct pattern. A taxpayer may deal in unusual business trans actions or with large amounts of cash, but this does not in itself mean that the cash transactions constitute unreported taxable income. Similarly, the mere fact that the income was understated over a period of years does not constitute 22 willfulness. As stated in O^Brien v. United States. proving the willfulness of a taxpayer eventually becomes "an attempt to probe the defendant's state of mind in the 23 light of all the circumstances. ..." First, one must determine the amount of tax due for the years concerned and the item or items that caused the underpayment. From this starting point, it is necessary to establish a pattern of action which reflects the knowl edge of tax evasion; this pattern of action must consist of
^^Grant v. United States. 184 P.2d 284, 39 AFTR 1045 (1st Cir7~T950l, cert, denied, ^%olland V, United States. 3^8 U,S, 121 (195^). ^^OtBrien v. United States. 51 P,2d 193 (7th Cir. 1931), cert, denied. 21 overt acts, such as altering invoices, using fictitious names for brokerage accounts, or other acts of deception. It is not unusual for the taxpayer to procarastinate to the Special Agent who is investigating the situation.
Taxpayers in general are not aware of the amount of time that is involved in checking public records which can be examined without disclosing the name of the prospective de fendant. The Special Agent is then able to talk with the taxpayer and most often determine whether the taxpayer is attempting a deception. He will continue to question the taxpayer even when it is apparent that the taxpayer's an swers are false. At the appropriate date, the Agent is able to establish the truth which would indicate the taxpayer was attempting to create an illusion. Once the taxpayer attempts a hoax, it can be assumed that he realizes he had done something illegal; and consequently, this establishes the willfulness. The above situation indicates the ease of proving vrill- fulness when a taxpayer attempts to "cover his trail." Had the taxpayer used the Fifth Amendment and refused to make any statements or produce any books and records, the Special Agent would have had a more difficult task of gathering cir cumstantial evidence. The taxpayer's use of the Fifth Anend- 24 ment may be pointed out to the jury by the prosecution.
^^Beard v. United States, 222 F.^d 84, 47 AFTR 808 (4th Cir. f; ciTrt. de^nied, 350 U.S. 846 (1955). '" '•! h'
22 It could have a bearing on the case but most likely would not be as detrimental as an obviously improvised fabrication.
Additional Tax Due and Owing The Government must prove that additional tax is due and owing, since it is by this manner that it establishes the fact that it has suffered harm.^^ A taxpayer can neither evade nor attempt to evade a tax that is not due.^o It is this understatement of tax th^t consti tutes the corpus delicti27 of a prosecution for willful attempted tax evasion. Proof of this element injects the substantive tax law into the crimina-1 trial and makes relevant and material any evidence bearing upon the tax computation.^8 If this element is not established, either be cause of the failure of the Government's proof, the defendant's showing of additional deduc tions, the utilization of any elections avail able to the defendant, or for any other reason, the Government's case must fail regardless of
^5Ro-bert riilton Schmidt, Legal and Accountin.g Handbook of Federal Tax Fraud (Englewood Cliffs, N.J.: Prentice-Hall, Inc., i9"S3T7'pT~Wr' United States v. Miro. 60 F.2d 58, 61, 11 APTR 696 (2d cirruwr. 27 ^Cornus delicti: the basic facts necessary to the commission of a crime. no For prejudicial error caused by a trial court's re fusal to allow the defense to introduce evidence that due to an error in the tax return the defendant did not o^re any tr^x even though the prosecution proved fraud, see Koo>^tz v. United States. 277 P.2d 53, 5 APTH 2d 1353 (5th Cir. I960). 23 the weight of the evidence bearing on the other elements of the offense.^9
It is generally accepted that the crime of tax evasion is complete with the filing of the fraudulent return, and all events prior to this date may be taken into considera- • tion in computing the tax. Thus loss carry-overs are taken into consideration, but loss carry-backs will not be re garded. As a practical matter, the Government normally computes the tax by using the maximum depreciation allowed and for criminal tax purposes eliminates the controversial aspects, such as the percent of one's residence that is used as a business office. The Government, after giving the taxpayer the benefit of any doubt, must show that a substantial amount of tax deficiency does exist. Consequently, for criminal tax purposes the Government may attempt to prove an under statement of tax considerably less than the amount set up as a deficiency for civil tax purposes.
The Role of the Accountant The tax practitioner plays an important part in shaping the tax practices of his clients. He usually participates
•^k taxpayer who deliberately understates gross receipts for the explicit reason of tax evasion cannot be succes^fally convicted under this statute if he has inadvertently or for some other reason omitted an equal amount of deductions. Hanson v. United States. 254 P.2d 359, 1 AFTR 2d I516 (6th Cir. 195^). 24 in the tax planning, prepares the tax returns, and repre sents the client before the Internal Revenue Service and in the Tax Court. The practitioner is expected to provide the quality of service that is a credit to the profession. He explains to his client the appropriate tax-reducing pro cedures that fit within the overall general plan of the client's business. The practitioner is expected to recom mend another member of the profession when it is evident that he cannot provide the necessary services. For this recommendation the accountant reaps his rewards from knowing that he has upheld the high standard.s of his profession. This quality of service should not stop when a client is being investigated for fraud. If the accountant believes that the client has intentionally concealed information necessary to prepare an accurate return, he may vxish to terminate the engagement. The usual practice is for the accountant to represent the client until the current fraud investigation is complete. Assuming th^t the accountant still believes the client deliberately concealed information, it is expected that he will discontinue any further business activities with this client. During the investigation, the accountant is expected to do everything within his ethical power to protect the client's interest; and if he cannot 25 provide this service, he should resign from the engage ment , -^ While the investigation is pending, the practitioner should exercise care in order not to become so involved in the investigation that it appears appropriate to resort to unethical methods, . It is not uncommon for a tax practi tioner to be convicted of a Federal tax offense. Some prac titioners feel it imperative tha,t their clients receive a larger refund each year, and they often find it necessary to resort to tax evasion. Practitioners have been knoTm to provide misleading documents, alter the date of a trans action, alter the facts of a transaction, and then tell half-truths to substantiate the dealings, believing that • the clients look upon these alterations with admiration.
The taxpayer may be pleased to receive- a large refund check, but it is quite another story, when he finds he is about to be audited by the Internal Revenue Service. The taxpayer who has relied on a qualified tax accountant has little to fear when being audited, for he can feel sure that the law has not been broken. Problems often arise when deal- ing with an unqualified tax consultant who has been known to stretch the law too far. It is vrell to note that a tax
^^Texas Technological College Tax Institute. Praceel- inn:s of Tax Institute (Lubbock, Texas, I963), PP. 33-53. 26 practitioner is not immune from prosecution once he sets up a tax evasion scheme.
There is no privileged communication between the client and the accountant, as the accountant may be compelled by law to relate t?^e most minute details of an avoidance plan as well as an evasion scheme. It is often revealed in court that the taxpayer has relied heavily on the advice of his accountant; this may prove to be most embarrassing to the practitioner should his client be convicted of tax evasion. An unsuccessful tax scheme may prove to be time-consuming and expensive as well as distressing. The following excerpt casts some light on the role of the accountant and the ex tent to which he is able to employ the tax loopholes in behalf of his client.
V7hy this extraordinary confusion? A reason able degree of predictability is possible in other aspects of Federal tax law. Upsets are constant, it is true, but parts of the law of wills, trusts, corporations, and evidence have jelled in the moulds. Not so the law of tax avoidance. It is almost always difficult, and often impossible, to know in advance what the law is. Uncertainty was never greater and the wisest is full of misgiving as to any step he may take. Indeed, wisdom may be in direct proportion to misgiving.3i
The accountant carries a great responsibility when considering a new tax plan for his client. The plan must
^•'-Randolph Paul, Studies in Pederal_^a-:atio}i (Cambridge, Mass.: Harvard University Press, 1937), P. 73. 27 be "reasonably sound" and have "a reasonably good chance of success. " If the plan is attacked by Internal Revenue Service, the client must not be subjected to criminal or civil penalties. In addition, the client should be fore warned that the plan is a "reasonable business risk," con sidering current court decisions and the Internal Revenue Service's reaction or acquiescence. It is recommended by some practitioners that a conservative approach is the best approach. The "audacious tax consultant" might suggest a tax plan with a short-lived financial and business advan tage, but the client will only be living in a "fool's para dise. "3^
In most instances, the client has resolved some doubtful issues prior to bringing the records to the tax practitioner. Those issues that do arise must be resolved on the basis of the facts irregardless of the detriment to the taxpayer.33 The tax practitioner must warn the client when .approaching the evasion line and furnish no encouragement, since the client is the more vulnerable. The experienced lational practitioner can distingu.ish between tax evasion and tax avoidance, but the inexperienced might rationalize the law for fear of losing a client.
^ Schwartz, "Functions of a Tax Consultant," BNA Practi cal Aspects of Federal Taxation. XX^C (1946), l4, 33 Harry Graham Baiter. Tax Pr'^a^d and Evasion (New York: Ronald Press Company, I963), P. 232", 28 It may be said with a certain amount of authority that the accountant should be more concerned with helping the client to be monetarily successful than avoiding taxes. Advocates suggest the accountant's time be invested in im proving the client's business,^ This line of thinking is sound as long as the consen^ative attitude is practiced with moderation and the client reaps the benefits that the law allows.
Once that tax evasion has been suggested, and the Intelligence Division of the Internal Revenue Service be comes involved in the situation, the role of the tax practi tioner becomes more important. It is most important that the accountant not attempt to advise the client on legal matters. Should the taxpayer call the accountant for advice when the Special Agents arrive, he should inform the tax payer to arrange an inte2?view with the Agents after obtaining the services of a competent tax attorney. Any comments the taxpayer wishes to make to the Agents should be made after obtaining the benefit of legal coimsel. The following should be noted by the accountant who finds his client involved in a criminal tax case:
It is extremely unfortunate that in spite o:)f a spate of warnings by ma.ny tax attorneys knowl edgeable in the fraud field, extending over a
3^ Cochran, "Tax Avoidance Schemes End in Disaster," Miami Law Quarterly. V (1951), ^35. 29 •decade at least, accountants continue in many instances to take it upon themselves to act and to speak for the taxpayer, without proper knowl edge or guidance, in areas which they do not and • are not expected fully to understand, to the serious and often fatal detriment of their client.35
After a fraud investigation has begun, the accountant's services become increasingly important primarily from the standpoint of the Government's emphasis on the net worth method of proving income. The attorney may request that the accountant prepare a net worth statement, and they will com bine their efforts to maximize the wealmesses due to infor mation not considered by the Goverrmient. The accountant will prepare most of the charts, graphs, and schedules which will be used during the trial to prove the taxpayer's innocence.-'
The Role of the Government The Government with its many channels of information may determine that a particular taxpayer's affairs are worthy of review. When a case is received by the Intelligence Divi sion, it may be assumed that fraud is suspected; otherwise, the case would be handled by another division of the Internal Revenue Service. The Intelligence Division assigns the
-^•^Harry Graham Baiter, "How to Defend a Tax Evasion Case Before Criminal Charp^es Are Brought, ' The^ Journal of Taxation, CLXII {September, I963), I65. ^ Texas Technological College Tax Institute. Proceed ings of Tax Institute (Lubbock, Texas, I963), PP. 33-53. 30 preliminary investigation to a Special Agent who normally informs the taxpayer at the initial interview that under the Fifth Amendment he cannot be compelled to produce any books or records or make any statements which he feels may tend to be incriminating. At this point, the taxpayer faces a dilemma. If he were following a tax avoidance plan and if he produces the books and records and is at a later date convicted of tax evasion, one might say he contributed to his own conviction. If he does not produce any books and records, might one con clude that he has something to hide? This is a point which must be resolved initially, perhaps vrithin five minutes after the taxpayer becomes aware of the investigation. The Special Agent is highly trained and skilled at instigating an interview when the taxpayer least expects it. At the time he is being advised of the right to remain silent, the taxpayer is also advised as to his right to an attorney. This initial intervievr may very well be the most important time during an investigation. The surprise of the taxpayer is frequently mixed with panic, and he might ask himself these questions: "Why are they really here? v:hat have I done wrong?" During these moments of mental turmoil on t'^.e part of the taxpayer, the skilled Special Agent vrill com mence with a statement similar to the following: "Nr. Tax payer, shall we sit do^.'3n and begin our discussion? If VOM 31 feel that you need an attorney or that you have done anything wrong, we will skip the question, " Thus the questioning be gins with the taxpayer confused about his need for an attor ney. If the taxpayer is reluctant and states that perhaps he should call- his attorney, the Special Agent may reply, "Mr. Taxpayer, if you haven't done anything wrong, why do you need an attorney?" Occasionally, the taxpayer must be insistent and often rude to invoke the rights explicitly guaranteed by the Constitution. The average taxpayer may make very damaging statements due to his being unaware of the implications of his answers during this surprise inter- View.
The initial interview is frequently long and covers a wide variety of points. Appendix A consists of a general outline of the points covered in the initial interview. The intei'view is terminated after the Special Agent has given the taxpayer a receipt for all books and records that are turned over to him. Obtaining these books and records at the time of the initial interview is of impor tance. It has been emphasized in a preceding section of this writing that oftentimes willfulness may be shown by the manner in which a transaction has been entered in the taxpayer's records. Following the initial intei^iew, the Agent writes a complete memorandum and prepares photographic copies of 32 all the records, vnth these records and the taxpayer's statements, the Special Agent is able to determine the po tential of the case. The Special Agent has from forty to eighty hours to determine if the case should be referred to another division or transfered to a numbered status. Once a case is numbered, it is more difficult to discontinue the investigation due to the amount of time, money, and effort that has been invested by the Government. The conviction of such a case is highly publicized with the hope of encour aging a higher degree of voluntary compliance with the tax laws.
The importance of the first few hours of the investiga tion cannot be emphasized enough. More often than not the taxpayer fuses the criminal tax evasion case together when, in effect, the element of willfulness could not have been proved notwithstanding his conduct during and following the initial interviex-j. The taxpayer deteinnines the amount of cooperation he will provide during the course of the investigation. There are varying degrees of cooperation, and the competent crimi nal tax lawyer will advise his client to coopera.te only to the extent that the facts warrant; however, the taxpayer may wait too long before engaging counsel. The point being made is blind cooperation contains the potential for turning tax avoidance into tax evasion, for once a statement is made and 33 recorded there is rarely an opportunity for striking it from the record. It is imperative that the taxpayer avail him self of the benefits of counsel before the initial interview. With the assistance of qualified counsel, a taxpayer is made aware of any existing problems. It may be.assumed that a competent investigator will locate the following during the . preliminary investigation even if the taxpayer refuses to cooperate and remains silent: (l) purchase and sale of real estate recorded in the county records, (2) stock brokerage transactions with local brokers, and (3) bank records on microfilm with local banks. The above might just as well be given to the Special Agent for the items in the name of the taxpayer or his immediate family, for they will probably be located. The attorney may advise the taxpayer to sur render copies of certain other records in the hands of third parties. This may be advisable if the investigator is aware of the records.
There are distinct advantages to be gained by creating an impression of cooperation, as the Agent may feel that the case, lacks willfulness. This cooperation may weigh heavily if the Agent is having difficulty determining whether or not to number the case and recommend prosecution. This attitude of having nothing to hide may influence the jury and the judge.^'
37Harry Graham Baiter, "When Should a Taxpayer Cooper ate with the IR3 in a 'Tax Evasion' Case?" T^ve^^Jour^^IlIl-^iu; Taxation. XX (February, 1964), 93-95. 3^ The disadvantages of non-cooperation should be con sidered. It may be assumed that the. taxpayer who has done nothing wrong has nothing to hide. Refusing to give the Special Agent the books and records he requests might result in the Agent using an indirect method of proving a tax de ficiency which often is inaccurate and is, at best, a good estimate. Failure to cooperate might cause the fifty per cent (50^) civil fraud penalty to be imposed. Refusal to cooperate will be so stated in the Special Agent's report and may have a bearing on whether or not the case is prose cuted. Non-cooperation may prolong the investigation and may be brought to the attention of the jury, assuming there is a trial. -^
While weighing the advantages and disadvantages for cooperation, the taxpayer may be advised by counsel as to the following: (l) There are no rewards for cooperation; if the facts warrant, the Agent will definitely recommend prosecution. If tax evasion has occurred, the investigator may be able to prove it; and if it has not occurred, the investigator will make this determination.^^ (2) Cooperation during the prosecution does not negate willfulness that can
• 38Harrv Graham Baiter, "When Should a Taxpayer Cooporr.te with the IRS in a 'Tax Evasion' Case?" The Journ?! of Ta-:.- tion. XX (February, 196^-). 93-95. 39 Ibid. 35 be proven by another means. (3) The investigator's purpose is to find an example to publicize the consequences of tax evasion.
Once the degree of cooperation has been established, there is no excuse for inadvertently submitting to any additional demands. Books and records can be summoned from third parties, and the competent tax attorney vrill quickly obtain all these records which may have a bearing on the case. The competent attorney will not allow the taxpayer to waive his rights even though the taxpayer exercises a 40 policy of limited cooperation. To briefly summarize, it is a necessity that a taxpayer have the benefit of "competent" counsel who will quickly immobilize the situation until the facts are interpreted. The taxpayer should make no comnients until the situation is determined as to its strengths and weaknesses. The weak nesses of a potential case must be developed properly. A competent accountant may then be engaged to detei'Taine the amount of any tax due and the extent to which income can be shifted to non-applicable years. It'is imperative that the non-qualified accountant and/or attorney be replaced
4o « Harry Gra.ham Baiter, "VJ'ien Should a Taxpayer Cooper ate with the IRS in a 'Tax Evasion' Case?" The Journ?! of Taxation, XX (February, 1964), 93-95. 36 immediately and that the taxpayer have access to all that the law allows.^-^
41 a Tax Evasion Harry Graham Baiter, "?'0W to Defend The Journ^.l of Case Before Criminal Charges Are Brought," Taxation. XIX (September, 1963), T:63-166. CHAPTER III
CONCLUSION
Summary The system of Federal taxation is based on the founda tion of voluntary compliance. The tax laws are enacted, interpreted, and carried out as is the will of the majority. The ultimate success of any lav7 is determined by the degree of public trust in the fairness and quality of the writing. VJith any system so designed, there are those who knowingly attempt to defeat the law by illegal processes as well as those who work diligently to follow the meaning of the law. Distinguishing between tax avoidance and tax evasion is a problem in interpretation of the Code, l^x avoidance is a process of planning one's affairs in order to pay the least amount of tax that the law allows. There is abso lutely nothing immoral, illegal, or unethical about tax avoidance. The tax practitioner is engaged by the client primarily to achieve this end. Tax practitioners in some instances have failed to provide the best service in their eagerness to spare their client from a large tax liabilit?/; however, by far the largest number have labored industri ously to provide the quality of tax interpretation that is a merit to the profession.
Tax evasion constitutes the willfijl attempt by a taxpayer
37 38 to evade and defeat a substantial amount of income tax due and owing to the United States; it may be restricted to three major elements. The first, "attempt," can be divided into two essential components: the first component is the intent to elude the tax; and secondly, there must be an overt act associated with furtherance of the intent. These two must be proven beyond a reasonable doubt. The second element of tax evasion is the taxpayer knowingly and willfully committing the attempt. It must be proved beyond a reasonable doubt that the taxpayer was aware at the time of filing the tax return that he was understating his tax liability.
.u The third element is the Government proving beyond a reasonable doubt that a substantial amount of tax is due and owing. The Government is. not required to prove the amount of the tax liability indicated in the indictment; it is only necessary to show there has been a substantial understate ment. It is necessary for the Government to prove the three elements of tax evasion for each count in the indictment; and if any one of the elements is not proved, the taxpayer cannot be convicted.
The law does not restrict this offense to the person or persons responsible for paying the tax; instead, it provides for the conviction of anyone who has coi:i^iitted the three ele ments constituting tax evasion. 39 The criminal aspects of tax evasion are separate and apart from the civil aspects of a tax case. One may be fined and/or sent to prison for violating the criminal sanctions of the Code. Once the criminal phase is concluded, the civil aspects begin; they encompass the establishment of a tax liability from the taxpayer's books and records. The tax payer is not able to invoke the Fifth Amendment, as there is no criminal action pending. After the establishment of the civil tax liability, assuming the facts warrant, the civil fraud penalty is asserted. Once the total tax deficiency is determined, six percent {6%) interest per year is computed and added to the amount of the tax.
Re c omjii e nda tion
The importance of distinguishing between tax avoidance and tax evasion has been thoroughly emphasized throughout this paper. The Internal Revenue Service has strived dili gently to erase the distinction by encouraging new legis lation and resisting any interpretations that do not conform to the Regulations. New lav;s have been written which re strict tax planning that has no business purpose other than the purpose of tax avoidance. The folloxfing sections of the
Code use the terms tax avoidance and tax evasion as if they hold the same meaning: sections 482, 552(b), 704(b), and
269(a). It is reasonable to expect additional legislation in this area, but legislation alone cannot remove the bsisic 40 differences between the terms. The courts have ruled for a number of years that it is perfectly legal for a taxpayer to plan his tax affairs to his OT'in benefit. This idea has been challenged strongly in recent years. Taxpayers in general have recognized the need for competent tax advice. Few individuals are able to cope with complex Federal tax laws J and for this reason, tax consultants have been faced with ever-increasing problems. Complex situations in addi tion to the desire to minimize the tax burdens have caused much concern in recent years. Most of the larger companies have recognized the need for improving the quality of their tax departments, and the more qualified tax consultants sponsor tax conferences in order to become acquainted with 'the current multitude of tax developments. The challenge is elevated by the often over-zealous Internal Revenue Service V7hich spares no methods and has fevr ethics in the never- ending cycle of creating more revenue through taxation. The Service is not bound by a particular code of ethics other than the moral ethics of the individual Agents.
Not time or money is spared in an effort to create new tax revenue. The history of court decisions suggests that the Service has lost cases in a particular field several times J but still, if the point of law can produce beneficial results, the Service may attempt a prosecution with the hope of winning a new, more favorable ruling. This line of ^1 thinking often may be seen in the area of criminal tax law. The Service may decide that a point of law needs to be set tled y the search begins then to find a particular set of circumstances that hopefully will prove the point. Often it is hidden in the search for circumstances. The search, if productive, will often disclose a set of circumstances that will carry the burden of guilt and allow the desired point to follow. This, in its simplest form, relates to the Trea sury Department's desire to prosecute the "underworld char acters" who have a reputation that carries the burden of guilt. It is of interest to note that many controversial and important decisions result from the prosecution of in dividuals with reputations that provide the necessary in fluence during a trial. This may be exemplified by a decision mentioned earlier in this thesis which held that a prose cuting attorney may comment to the effect that a defendant refused to produce books and records or cooperate vjith the
Special Agents. In the particular case of Beard v. United 42 States, the defendant was a bookie. The precedence arising from this case opened the door for additional decisions which might tamper with one's use of the Fifth Amendment. The Internal Revenue Service is particularly concerned with the area of tax avoidance; and it is apparent that the
42 Beard v. United States. 42 search has beguji to find a particular set of circumstances that will carry the burden of guilt with the expectation of eroding the once-steady ground of tax avoidance in tax plan ning. The race in order to find the circumstances may prove to be most interesting for the tax planner. Unless the Service can find the seemingly perfect case, it is not un reasonable to expect the area of tax avoidance to be com pletely sheltered once again by the Supreme Court. Should the Service find the ideal case, the term tax avoidance may be short-lived. Extreme care should be exercised by tax attorneys to probe for the right case which will inevitably stop the erosion. This case should be developed even if necessary at the expense of an interested group. The idea of tax planning and tax avoidance is basic to the democratic process, for the laws are indirectly made by the people for the people. Consider the far-reaching implications if by chance the precedence is set which holds that a taxpayer cannot plan his affairs with the ultimate objective of re ducing an operating expense. This in effect would suggest that an individual should plan his affairs to produce the greatest tax liability, and this line of thinking does not conform to the basic concepts of democracy.
The Internal Revenue Service appears primarily to be in conflict over terminology? it has strived to defir.e tax avoidance in the same manner as others define tax evasion. 43 It may be that the ultimate results will be in the favor of the definition desired by the Internal Revenue Service? but even if the tv7o terms, avoidance and evasion, were to carry the same connotation, the basic problem vjould still exist. As long as men write tax laws, the laws will be subject to the errors that result from the choice of the words that are used to express them. These errors will result in loopholes that enable tax avoidance to thrive. It would not be un reasonable to expect the future to hold a new term for "the use of tax loopholes," but the use of the loopholes will prevail. It is suggested that careful consideration be given to the terminology of "tax avoidance" and "tax evasion." The professional tax societies are urged to recognize the con flict of terminology that has prevailed over the years with little hope of relief in the imminent future. Perhaps a vrritten pronoimcement or statement is necessary to give uni formity to terminology. The sections of the Code which refer to tax avoidance and tax evasion as synonyms need to be ex pounded upon so as to explain their impact on tax planning. Now as never before, this confusion needs to be distinctly eliminated by definition. History has reiterated time and time again that the coui^ts follow prior decisions as well as the current mood of the judicial process. The pronouncements of the 44 professional societies carry a great deal of weight, for it most often reflects the long-range thinking of most of its members, A pronouncement by the societies should standardize the thinking of its members and alleviate the overlapping of terminology. The pronouncements are normally read by the members of the judicial process, and often the members of the societies are part of the judicial process. It is apparent that now is the time for action; waiting will result in additional court decisions based on insecure pre cedence. To clear the air, a dynamic force must have the initiative and command the lead. BIBLIOGRAPHY
Baiter, Harry Graham. "How to Defend a Tax Evasion Case Before Criminal Charges Are Brought." The Journal of Taxation, XIX (September, I963), 163-166"; Baiter, Harry Graham, Tax Fraud and Evasion. 3rd ed New York: Ronald Press Compa^ny, I963. Baiter, Harry Graham, "Tax Fraud and Evasion." Journal of Taxation. XX (April, 1964), 250-252. Baiter, Harry Graham. "When Should a Taxpayer Cooperate with the IRS in a 'Tax Evasion' Case?" The Journal of Taxation. XX (February, 1964), 93-95. Cochr-an. "Tax Avoidance Schemes End in Disaster. " Miami Law Quarterly. V (1951), ^35. Committee on Federal Taxation of The. American Institute of Certified Public Accountants. Statements on Responsi bilities in Tax Practice. Signature of Preparer. New York: American Institute of Certified Public Accoun tants, Inc., 1965.
Committee on Federal Taxation of the American Institute of Certified Public Accountants. Statements on Responsi bilities in Tax Practice. Sip-nature of Reviewer: As sumption of_. Prepg.rer's Responsibility. New York: American Institute of Certified Public Accountants, Inc., 1965. Gutkin, Sydney A,, and Beck, David. Tax Avoidance vs. Tax Evasion. New York: Ronald Press Company, 1*958. Internal Revenue Code of 19^^4. ^Englewood Cliffs, N.J.: Prentice-Hall, Inc., Z1964/. Norwood, Fred W,, and Chisholm, Sam W. Federal Income Taxes; Re search,, and . Plannin.p;. Englewood Cliffs, N,J, : Prentice^ HallT Inc., 1962, Paul, Randolph, StLud_i.eg__ih-_Federal Taxation. Cambridge, Mass, : Harvard University Press, 1937. Schmidt, Robert Milton, Lercal and Accounting: H?,ndboo'^ of Federal Tax_Praud. Encclewood Cliffs", N.J,'r "jPrentice- Hall,^ inc,"", 1963.
45 46
Schwartz, "Functions of a Tax Consultant," Practical Aspects of Federal Taxation. Bureau of I^ational Affairs. 19^!+^; Texas Technological College Tax Institute. Proceeding;s of The Fourth Annual Texas Tech Tax Conference. Lubbock, Texas, 1956. Texas Technological College Tax Institute. Proceedings of Tax Institute. Lubbock, Texas, I96I. Texas Technological College Tax Institute. Proceedings of Tax Institute. Lubbock, Texas, I963. U.S. Constitution. Art. I, sec. 2, clause 3. U.S. Constitution. Art. I, sec. 7, clause 1. U.S. Constitution. Art. I, sec. 8. U.S. Constitution. Amendment XVI. TABLE OF CASES
Beard v. United State.g. Bullen V. Wisconsin. Brushaber v. Union Pacific R.H. Co. Grant v. United States. Halle V. Comraissioner. Hanson v. United States. Helvering; v. Greg:ory. Holland v. United States. Koontz V. United States. Marshall v. Commissioner. O'Brien v. United States. Pollock V. Fanners Loan and Trust Co. Sawtell V. Coi?:nissioner. Spies V. United States. Standard Oil Co. v. United States. Tinkoff V. United States. United States v. Brill. United States y. J_o_hnscin. United States v. I-artell. United S19. t e s v^_ jji ro. United State? v. Stoehr.
4? APPENDIX I
The Initial Interview I. Introduction of Special Agents and purpose of Intervievr A. Explain constitutional rights B. Explain purpose of visit II. Proper identification of taxpayer A. Name 1. Personal names used 2. Business names used B. Place and date of birth C. Marriages 1. W'ife's maiden name 2. Ex-wife's name 3. Determine non-community property D. Addresses (appropriate years) 1. Business address 2. Residence E. Occupation and business (principal and spouse) 1. Years involved 2. Partners and/or associates 3. Percent of ownership F. Education 1, Determine knowledge of tax laws 2. Highest grade of education obtained G. Health H, Dependents 1. Names and ages 2. Relationship to interviewee III. Location of monies on deposit A. Banks (names and locations) 1. Personal accounts 2. Business accounts 3. Savings accounts 4. Loans (amounts, dates, purposes, balances) 5. Determine other ba.nks used 6. Safe deposit bozes a. Names and locations b. V7hen last opened c. Contents B. Savings and loan associations C. Stockbrokers 1. Names used 2. "Street" names used D. Determine other funds on deposit 48 49 IV. Books and records A. Business records maintained 1. Where maintained 2. Who keeps records 3. What type of records ^. Detennine availability of records B. Personal records maintained 1. Type of records 2. V7ho keeps records 3. Where maintained k. Determine availability of records C. Accounting method used 1. Cash 2. Accrual D. Determine extent of control over records V. Assets: Taxpayer and spouse A. Loans receivable B. Stocks and bonds C. Real estate and residences 1. When purchased 2. Location 3. Cost and later improvements 4. Determine source of funds for payment D. Equipment and automobiles E. Other assets valued over established minimum VI. Liabilities A. Loans and notes payable B. Personal charge accounts C. Estimate of personal living expenses VII. Receipts: .Taxpayer and spouse A. Taxable 1. Wages 2. Dividends 3. Interest 4. Rents and royalties 5. Sale of assets 6. Farm income 7. Other receipts B. Non-taxable 1. Collections on notes 2. Inheritances (vrhen and from whom) 3. Gifts (vrhen and from vrhom) 4. Insurance proceeds C. Funds belonging to taxpayer held by others D. Funds belonging to others held by taxpayer E. Determine cash on hand 50 VIII. Determine financial practices A. All funds deposited B. Separate business and non-business C. Cash on hand D. Expenses paid in cash E. Business expenses paid from personal funds P. Funds borrowed from business G. Use of casMers' checks H. Checks cashed for others I. Redeposits J. Extent of use of cash IX. Tax returns A. Identification 1. Signature 2. Where prepared, signed, and mailed 3. By whom prepared E. Information used to prepare return 1. Records used 2. Work papers used 3. Oral instructions 4. Determine if completed return was discussed between taxpayer and accountant C. Discuss pertinent items on return D. Determine if all income was reported E. Determine if all expenses were deducted X. Inventory of safe deposit box XI. Obtain books and records and present receipt XII. Conclude inters;lew A. Discuss allegations B. Carefully record allegations C. Develop fabricated stories completely XIII, Arrange for another interview at a later date