Tax Crimes: Section 7203 and Willful Failures to File a Tax Return
What is Section 7203?
Section 7203 of the Internal Revenue Code creates the federal crime of willfully failing to (1) file a tax return, (2) supply information, or (3) pay a tax. The Department of Justice’s position is that this misdemeanor offense of willfully failing to file a tax return, pay tax, keep records or supply information should only be charged when a defendant failed to comply with an affirmative requirement of the Internal Revenue Code or regulations and did not commit any act or omission as part of an attempt to evade taxes or obstruct the IRS. DOJ maintains that cases involving individuals who fail to file tax returns or pay a tax but who also commit acts of evasion or obstruction should be charged as felonies under Section 7201 or Section 7212(a) to avoid inequitable treatment.
Section 7203 describes four separate federal crimes:
[a] Failure to pay an estimated tax or tax;
[b] Failure to make (file) a return;
[c] Failure to keep records; and,
[d] Failure to supply information.
Notably, except for cases involving willful violations of any provision of IRC § 6050I, all of the offenses under Section 7203 are misdemeanors. The most common charge under section 7203 is related to the failure to file a tax return.
The statute provides as follows:
Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction, thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “5 years” for “1 year.”
I.R.C. § 7203
I. Failure to File a Return
In order to establish a violation of section 7203 for failing to file a tax return, the government must establish the following three elements:
[a] Person required by law to file a return for the taxable period [I.R.C. § 6012];
[b] A failure to file a return at the time required by law [I.R.C. § 6072]; and,
Required by Law to File a Return
A number of Internal Revenue Code provisions and regulations potentially provide that a taxpayer has an obligation to file a tax return. Section 6012, for example, lists a number of persons and entities that are required to file an income tax return. Notably, in order to satisfy this element, the government is not generally required to prove that taxes are due, but only that the taxpayer was required to file a tax return. That obligation is generally tied to the amount of gross income received by the taxpayer during the year.
“Gross income” is broadly defined in section 61(a) of the Code to mean the following:
[A]ll income from whatever source derived, including (but not limited to) the following items:
(1)Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(8) Alimony and separate maintenance payments;
(10) Income from life insurance and endowment contracts;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
Failure to File a Return at the Time Required by Law
The government is often able to prove a taxpayer’s failure to file a return through a certified transcript of the taxpayer’s account or a certificate of assessments and payments.
Willfulness may be inferred from a number of circumstances, including:
a failure to file tax returns during multiple years;
the fact that a taxpayer filed timely returns in prior years, which indicates that the taxpayer knew of the filing obligation;
a taxpayer’s failure to file state tax returns;
the receipt of a form W-2, which may be treated as a reminder of the obligation to file.
Notably, the government’s position is that an intent to file in the future is not a defense to a charge under section 7203. Nor is a lack of funds a legal defense for a failure to file tax returns.
A willful failure to file a tax return under section 7203 may rise to the level of a willful attempt to evade or defeat tax under section 7201 if the government can demonstrate an affirmative act.
II. Failure to Pay a Tax
Section 7203 makes it a crime failed to pay a tax if the following three elements are present:
[a] The person is required by law to pay a tax;
[b] There is a failure to pay a tax at the time required by law; and
The primary distinction between an attempted invasion of payment that is a violation of section 7201 and a violation of section 7203 for failing to pay tax is the existence of an affirmative act that is necessary to prove tax evasion under section 7201.
Required by Law to Pay
This element is based upon obligations imposed under I.R.C. § 6151(a), which provides that:
Except as otherwise provided in this subchapter, when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return ….
Failure to Pay a Tax
The government is often able to prove a taxpayer’s failure to pay through a certified transcript of the taxpayer’s account or a certificate of assessments and payments.
The willfulness element takes on much the same meaning as in other contexts of the tax law. Willfulness is defined as the “voluntary, intentional violation of a known legal duty.”
III. Failure to Keep Records
In order to establish a violation of section 7203 for failing to keep records, the government must demonstrate the following two elements:
[a] Person required by law to maintain books and records; and
[b] The willful failure to maintain books and records.
Treasury regulations require that a taxpayer “keep such permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information.” Treas. Reg. 1.6001-1(a).
IV. Failure to Supply Information
In order to establish a violation of section 7203 for failing to supply information, the government must demonstrate the following three elements:
[a] Person required by law to supply information;
[b] Failure to supply information at the time required by law; and
For more Insights in our Tax Crimes series, see The Crime of Tax Evasion, Tax Evasion: Attempting to Evade the Assessment of Taxes, and Tax Evasion: Evading the Payment of Tax.