Can You Go to Jail for Not Paying Your IRS Taxes?
Taxpayers routinely ask me if they can go to jail for not paying their federal income taxes. Admittedly, the bar is not that high for felony tax evasion—the government must only prove three elements: (i) willfulness; (ii) the existence of a tax deficiency; and (iii) an affirmative act constituting evasion or attempted evasion of tax.1 Because the existence of a tax deficiency is generally not a big issue in non-payment cases, the government is left focusing on the remaining two elements: the taxpayer's state of mind and evidence of affirmative acts.
Although the bar for federal tax evasion is low, the government does not have the resources nor the will to go after all evasion non-payment cases. Instead, the government carefully picks and chooses the cases it believes to have the best chances for obtaining criminal convictions. Predictably, this is where the types and quantities of affirmative acts come into play. Because the recent Sixth Circuit decision in Pieron2 shows this well, that decision is the topic of this article.
Background.
James Pieron, Jr. ("Pieron"), a United States citizen, lived in Switzerland from 1999 through 2009. He ran a successful currency-trading company and paid Swiss taxes. However, in 2008, his stepfather, an accountant, correctly informed Pieron that he also had U.S. income tax obligations, notwithstanding his residence overseas in Switzerland.
In January 2011, Pieron attempted to become at least partially compliant with his prior year United States reporting obligations. Specifically, he hired American Tax Solutions, which prepared his 2008- and 2009-income tax returns. Pieron submitted both of those returns to the IRS; however, he did not make any payment of tax with the returns. After the returns were filed, the IRS began to send Pieron notices of amounts due in excess of $500,000 for his 2008 and 2009 tax years.
Pieron made a series of collection alternative offers to the IRS. First, he offered the IRS a monthly installment payment of $1,500. The Sixth Circuit noted that "Pieron's [proposed] payment schedule would run more than a quarter-century." The IRS did not respond to the offer, although Pieron made six monthly payments of $1,500.
Later, based on the advice of his CPA, Pieron submitted amended returns for 2008 and 2009 reporting no taxes owed. He also filed an offer in compromise on the basis of doubt as to liability, offering the IRS $30,000 to fully resolve his tax liabilities. The IRS did not respond to Pieron's second proposal either.
In 2018, the government indicated Pieron for "willfully attempt[ing] to evade and defeat the payment of income taxes due and owing by him to the United States of America for the calendar years 2008 and 2009, by committing affirmative acts of evasion." After the indictment, Pieron paid $870,117 to the IRS, or the full amount of taxes, penalties, and interest owed for 2008 and 2009.
Although Pieron had made full payment, the government continued its criminal prosecution against him. During trial, the government presented evidence that—while Pieron's 2008 and 2009 taxes remained unpaid—Pieron had moved millions of dollars from his personal bank accounts in Switzerland to U.S. companies that he wholly controlled. After those funds had been transferred, he used those same funds to pay for expensive vehicles and luxury items. A jury found him guilty of felony tax evasion, and the district court sentenced him to 15 months' imprisonment. Pieron appealed.
The Sixth Circuit's Decision.
On appeal, Pieron argued that the government had failed to present sufficient evidence to support a felony evasion charge. Regarding the existence of a tax deficiency element, the Sixth Circuit noted that the government had used Pieron's 2008 and 2009 tax return submissions as evidence that he had tax deficiencies for both years. The Sixth Circuit found no error here on the basis of Pieron's own tax returns reporting taxes owed.
The Sixth Circuit also found meritless Pieron's argument that the government had failed to provide evidence of an affirmative act. The Sixth Circuit noted that affirmative acts of evasion can include "concealment of assets" and "any conduct, the likely effect of which would be to mislead or conceal." Given this standard, the Sixth Circuit found that the jury's determination was supported by at least three affirmative acts:
First, in August 2012, Pieron submitted a Foreign Bank Account Report in which he told the IRS that the balance for his JDFX Credit Suisse account had not exceeded $250,000 for 2009.3 Yet the government introduced records showing that Pieron transferred almost $750,000 from the same account to his IB Tech account in November 2009.
Second, in January 2012, Pieron submitted Form 433-F—also known as a collection information statement—4in which he told the IRS that his only assets were $3,500 in two checking accounts, a $25,000 Volkswagen, and a $1,000 interest in Navitas and also in Komplique. Yet at the same time Pieron was driving a $110,000 Mercedes that he paid for with Komplique funds and titled in Komplique's name; and the month before he filed the 433-F, Pieron had access to $200,000 in Komplique's account.
Third, two years later, Pieron traded in that Mercedes for a new one costing $139,000, paid for with funds from a Krescent account, and titled in Krescent's name. Yet Pieron's 433-F for 2014 omitted any mention of Krescent or the Mercedes.
Suffice it to say that we agree with the district court that "the Government introduced compelling evidence that [Pieron] continued to evade his taxes after January 9, 2012."
Parting Thoughts.
Pieron shows the dangers of not paying federal income taxes on time. It further demonstrates that taxpayers must tread carefully when making collection alternatives to the IRS, which often require the submission of financial information. Taxpayers who submit false information to the IRS run an increased risk that the government will use the submission itself as an affirmative act to support a felony tax evasion case. Moreover, the false submission may constitute an additional and separate federal crime.
Footnotes
1. 26 U.S.C. § 7201.
2. U.S. v. Pieron, 130 AFTR 2d 2022-XXXX (6th Cir. Aug. 30, 2022).
3. FBARs require taxpayers to report the maximum account balance of any foreign account, provided the cumulative value of the accounts exceeds $10,000 at any time during the tax year.
4. IRS Forms 433, including Form 433-F, are used by the IRS to determine whether a taxpayer qualifies for a collection alternative, such as an offer in compromise or an installment agreement. They request a full picture of the taxpayer's financial condition and must be submitted to the IRS under penalties of perjury.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
