Ignorance is Bliss, Especially for the Tax Evader
(presented for educational purposes) Copyright (c) 1993 Northwestern School of Law Journal of Criminal Law & Criminology Summer, 1993
Comedian Steve Martin, in an old stand-up routine, tells his audience that by following his simple plan, they can have a million dollars and never pay taxes. Step one, he advises, is to get a million dollars. Step two, naturally, is to not pay taxes. The beauty of the strategy, however, rests in step three. When the Internal Revenue Service agent comes to your door asking why you have not paid taxes, Martin says, simply smile and say, “I forgot.” n1
Although Martin was joking, under current Federal tax law, his plan succeeds. “Forgetting” to pay your taxes actually constitutes a valid defense to a charge of criminal tax evasion. n2 Other defenses include believing that wages are not income or that paper currency is not money. n3 Forget what your criminal law professor taught you. Ignorance of the law is an excuse in tax crimes, and the only joke is on the Internal Revenue Service.
The Internal Revenue Service (“IRS”) may assess criminal charges on taxpayers who willfully evade the payment of income taxes. n4 In Cheek v. United States, the United States Supreme Court interpreted “willfully” as the taxpayer’s actual knowledge that his actions violate the law. n5 One who avoids taxes can avoid conviction by demonstrating his truly held belief that he owes no taxes. n6 Moreover, the jury may not consider the reasonableness of this belief. n7
The Supreme Court’s interpretation of “willfulness” in Cheek created a huge tax loophole. This comment argues that Congress must close the Cheek loophole by modifying the Internal Revenue Code. The law should hold a taxpayer in “willful” violation of the tax code if he either subjectively intends to break the law or if, under an objective standard, he unreasonably relies upon a mistaken belief about the tax law. Part I traces the development of the “willfulness” doctrine, discussing the traditional rule that ignorance of the law is no defense to a crime, the split in the circuit courts regarding the interpretation of “willfulness,” and the Supreme Court’s decision in Cheek. Part II examines the post-Cheek application of the doctrine to tax evasion and to other white collar crimes. Part III argues that the law should require a taxpayer’s mistaken belief that he does not owe taxes to be both objectively reasonable and truly held to serve as a defense.
- Development of the “Willfulness Doctrine”
- The Law of Ignorance and Mistake
A mistake of law occurs, for example, when one person shoots and kills another, believing that murder is not a crime. n8 A mistake of fact, on the other hand, occurs if that same person knows that murder is illegal, but pulls the trigger anyway under the mistaken belief that the gun is not loaded. n9 When a taxpayer miscalculates her income, she makes a mistake of fact, but if she believes, for instance, that the Internal Revenue Code does not tax capital gains, she operates under a mistake of law. In most cases, enormous legal consequences hinge on whether the defendant made a mistake of fact or a mistake of law. Generally, mistake of law is no defense to a criminal act, while mistake of fact is a valid defense if the error is both reasonable and honest. n10 The tax law, however, renders the distinction meaningless, because either type of mistake exculpates the defendant if honestly, even though unreasonably, made. n11 The tax law’s failure to distinguish between mistakes of law and fact represents a significant departure from traditional criminal law.
“Ignorantia legis neminem excusat,” or “ignorance of the law excuses no man” ranks among the most familiar maxims of law. n12 This rule usually applies regardless of the severity of the crime, and even if the entire community holds the mistaken belief. n13 Commission of a crime requires both a criminal act and a criminal intent, although the defendant need not specifically intend to break the law. n14 Simply intending to commit the criminal act satisfies the intent requirement in all but a small class of offenses in which the mental element is part of the crime itself. n15
There are numerous reasons why the law has not historically allowed ignorance to excuse a criminal act. Protecting the public safety and welfare requires the presumption that each person knows the law. n16 Justice Oliver Wendell Holmes made the following observation:
Public policy sacrifices the individual to the general good. It is desirable that the burden of all should be equal, but it is still more desirable to put an end to robbery and murder. It is no doubt true that there are many cases in which the criminal could not have known that he was breaking the law, but to admit the excuse at all would be to encourage ignorance where the law-maker has determined to make men know and obey, and justice to the individual is rightly outweighed by the larger interests on the other side of the scales. n17
By establishing the rule that each citizen “must know what the law is and act at his peril,” n18 the law encourages knowledge in an arena where ignorance is extremely harmful. Without this policy, said one court, “a person accused of crime could shield himself behind the defense that he was ignorant of the law which he violated and immunity from punishment would in most cases result…. The plea would be universally made, and would lead to interminable questions incapable of solution.” n19
- Specific intent crimes
Some crimes require specific intent, or knowledge of violation of the law, as an essential element. In specific intent crimes, ignorance or mistake can serve as a defense if it negates the required mental state. n20 Certain statutes, including the Internal Revenue Code, expressly criminalize only “willful,” “knowing,” or “purposeful” conduct. n21 Such statutes, however, have received different treatment from the courts depending on the nature of the regulated activity.
For example, in United States v. International Minerals & Chemical Corp., n22 the Supreme Court held that a shipper could “knowingly” violate a regulation without knowledge of the regulation’s existence. n23 The defendant, International Minerals, was charged with shipping sulfuric and hydrofluosilicic acid interstate without proper shipping papers, in violation of Interstate Commerce Commission regulations. n24 International Minerals made no mistake of fact; it knew the shipment contained corrosive materials. n25 Rather, International Minerals contended that it was unaware of the regulation, and the question before the Court was, therefore, whether to allow the mistake of law as a defense. n26 A divided Court did not permit ignorance of the regulation to be a defense to its violation. n27 Because of the involvement of dangerous materials, “the probability of regulation is so great that anyone who is aware that he is in possession of … or dealing with the materials must be presumed to be aware of the regulation.” n28 The majority reached the holding over the dissent of Justices Stewart, Harlan, and Brennan, who argued that a defendant cannot “knowingly” violate a regulation if the defendant is not aware of the terms of the regulation or that the activity violates the regulation. n29 According to the dissent, the majority opinion ignored the statute’s use of the word “knowingly.” n30
- “willfulness” in tax law
The Internal Revenue Code uses the word “willful” liberally. n31 Before the Court addressed the issue in Cheek v. United States, several circuit courts formulated their own interpretations of the willfulness component of tax crime.
The Fifth and Tenth Circuits applied a subjective test, which asked whether a tax crime defendant truly believed his actions complied with the law. In United States v. Phillips, n32 a taxpayer defended himself on the grounds that he truly believed his wages were not income. n33 The trial court had instructed the jury as follows:
A mistake of law must be objectively reasonable to be a defense. If you find that the defendant did not have a reasonable ground for his belief, then regardless of the defendant’s sincerity of belief, you may find that he did not have a good faith misunderstanding of the requirements of the law. n34
The trial court convicted the defendant under this instruction, but the Tenth Circuit reversed and remanded for a new trial. n35 The court reasoned that by requiring a “willful” violation, Congress did not intend to impose criminal liability on those who rely on their good faith belief that they need not file a tax return. n36 For this reason, the Tenth Circuit stated, courts should use a subjective standard when evaluating a defendant’s claim that he did not know he was breaking the law. n37 Thus, prosecutors must prove that tax evasion defendants subjectively intended to disobey the law.
The subjective intent standard of Phillips paralleled decisions in several other circuits. n38 The circuits following the subjective standard have carefully distinguished between those taxpayers who misunderstand the law and those who understand but disagree with it. n39 A taxpayer who is unaware of the law may assert ignorance as a defense, but a taxpayer who merely disagrees with the law may not. n40
Before the Supreme Court decided Cheek, the Seventh Circuit took a different approach n41 by permitting only honest and reasonable mistakes as a defense to a tax evasion charge. n42 The Seventh Circuit applied an objective test to the taxpayer’s mistaken “belief.” n43 If a reasonable person would realize the groundlessness of the belief, the court may impose criminal sanctions. n44 A defendant’s honest but unreasonable belief that he owed no taxes was held to be no defense to tax evasion. n45 If a court found the defendant’s belief unreasonable as a matter of law, the sincerity of the belief became irrelevant. n46 In such a case, the court was not obligated to accept evidence demonstrating that the defendant actually held the mistaken belief. n47
Under the Seventh Circuit’s pre-Cheek approach, courts determined the reasonableness of a belief on a case by case basis. n48 In United States v. Buckner, n49 however, the court accepted the prosecutor’s list of five defenses which would always be considered unreasonable, or, in Judge Easterbrook’s words, “sanction bait.” n50 The prima facie unreasonable defenses included the belief that the Sixteenth Amendment, establishing income taxes, was never properly ratified, that wages are not income, that tax laws are unconstitutional, that filing a return is self-incriminating and therefore privileged by the Fifth Amendment, and that federal reserve notes are not income. n51 The court noted that a mistake could be reasonable only if there was a genuine dispute about the law. n52
These five rejected defenses are all common defense tactics of tax protestors. n53 The Seventh Circuit developed the objective standard to combat what it perceived as abuse of the legal system by the tax protest movement. n54 It vigorously defended its standard, even in the face of criticism from other circuits, n55 in part out of its desire to deprive tax protestors of their favorite weapons. The subjective standard followed in other circuits deferred to the “true beliefs” of the defendant, an approach the Seventh Circuit simply refused to accept. As Judge Easterbrook wryly noted, “some people believe with great fervor preposterous things that just happen to coincide with their self-interest.” n56
The tax protest movement frustrated the increasingly impatient Seventh Circuit with creative but absurd defenses. In United States v. Witvoet, n57 for example, the defendant argued that he did not pay taxes because “tax experts” advised him that payment of income tax was “purely voluntary” and in some cases, illegal. n58 One of these experts called himself a C.P.A., a designation not for “certified public accountant,” but for “citizen’s protection agent.” n59 In United States v. Davenport, n60 the defendant gave several reasons for not paying his taxes. First, “ninety-eight percent of federal reserve notes were bogus.” n61 Second, tax laws only applied to government workers and corporate officers. n62 Finally, the defendant reasoned that wages were not income because income tax is based on “net receipts after deduction of all expenses.” n63 The Seventh Circuit rejected all of these beliefs as objectively unreasonable. n64
- The Cheek Decision
In 1991, the United States Supreme Court addressed the conflict between the circuits in Cheek v. United States. n65 In Cheek, the Court faced the task of defining “willfully,” and determining whether a defendant taxpayer could use an honest but unreasonable mistake of law as a defense. n66
John L. Cheek, an American Airlines pilot, stopped filing income tax returns in 1980. n67 Additionally, he claimed as many as sixty withholding allowances on his W-4 forms. n68 The IRS charged Cheek with six counts of willfully failing to file a federal income tax return in violation of United States Code Section 7203, n69 and three counts of willfully attempting to evade federal income taxes, in violation of United States Code Section 7201. n70
Representing himself at trial, Cheek testified that in 1978, he began following the advice of a group which believed, among other things, in the unconstitutionality of income taxes. n71 Cheek claimed he had not acted willfully because he had sincerely believed the teachings of this group. n72 Cheek also claimed to believe that wages were not income and that he was not a “person” as defined by the Internal Revenue Code. n73
The district judge instructed the jury that “willfulness” meant a “voluntary and intentional violation of a known legal duty, a burden that could not be proved by showing mistake, ignorance, or negligence.” n74 The court also instructed the jury that a reasonable, good faith mistake of law would negate willfulness, but mere disagreement with the law would not. n75 When the jury requested clarification of the good faith requirement, the judge instructed that “an honest but unreasonable belief is not a defense and does not negate willfulness.” n76 Under this standard, the jury found Cheek guilty. n77
Cheek appealed, arguing that the district court erred by giving the jury an objective reasonableness instruction. n78 The Seventh Circuit, following its own precedent, upheld the instruction. n79 Because the Seventh Circuit’s interpretation of “willfully” in the tax code conflicted with the interpretation of other circuits, the Supreme Court granted certiorari. n80
The Supreme Court began by noting the traditional principle that ignorance of the law provides no defense and the corresponding presumption that every person knows the law because the law is “definite and knowable.” n81 The Court said, however, that the growing volume and complexity of statutes and regulations, including the Internal Revenue Code, raised questions about the soundness of this premise. n82 Consequently, the Court long ago determined that Congress used the word “willfully” in the tax code to carve an exception to the traditional principle. n83 The Court recalled its sixty year old statement from United States v. Murdock:
Congress did not intend that a person, by reason of a bona fide misunderstanding as to his liability for the tax, as to his duty to make a return, or as to the adequacy of the records he maintained, should become a criminal by his mere failure to measure up to the prescribed standard of conduct. n84
Since Murdock, the Court had defined “willfully,” in the context of the tax code, as a “voluntary, intentional violation of a known legal duty.” n85
Cheek argued that by allowing the jury to consider the objective reasonableness of his beliefs, the district court’s instruction was inconsistent with the Murdock interpretation. n86 The Supreme Court agreed, stating that the jury should have determined whether the prosecution had proved Cheek’s awareness of his duty to file a return and pay taxes. n87 The objective reasonableness of his claimed belief or misunderstanding was completely irrelevant to this question. n88 No matter how unreasonable a jury might find Cheek’s belief that the Internal Revenue Code did not treat wages as income, if they found that Cheek truly held such a belief, they must acquit him. n89
The Court rejected Cheek’s claim that he believed income tax laws violated the Constitution. n90 This belief, said the Court, was not an innocently mistaken belief about the content of the law, but a studied conclusion that the law was invalid. n91 In other words, Cheek did not make a mistake about the law; he simply disagreed with it. n92
Over the dissent of Justices Blackmun and Marshall, who feared that the majority opinion would “encourage taxpayers to cling to frivolous views … in the hope of convincing a jury of their sincerity,” n93 the Court vacated and remanded the case. n94 The Seventh Circuit, the majority held, erred by allowing objective reasonableness to enter the calculation. n95 Thus, Cheek demands a purely subjective inquiry into the taxpayer’s mental state to determine whether the defendant willfully violated the tax code. n96
- “Willfulness” After Cheek
Commentators have given Cheek mixed reviews. One commentator hails the decision for striking “a sensible balance between disciplined regard for the dictates of precedent and awareness of practical policy ramifications.” n97 The Seventh Circuit approach, he argues, would have “benefitted judicial economy at the expense of logic and consistency.” n98 Another commentator, however, contends that the Supreme Court’s narrow interpretation of “willfulness” emasculates the Internal Revenue Code by making it virtually impossible to convict tax evaders. n99
Cheek has raised new questions as the circuits struggle to determine the scope of Cheek’s definition of “willfulness.” Circuit courts have construed Cheek narrowly in some cases but broadly in others. n100
- Application of Cheek to Tax Cases in the Courts of Appeals
The Second Circuit gives Cheek its broadest reading. n101 In United States v. Regan, n102 the Second Circuit relied on Cheek to reverse a district court decision. n103 In Regan, an investment firm entered into several stock sale and repurchase agreements with other investment houses in order to recognize tax losses on stock which had depreciated in value. n104 The defendants improperly recognized tax losses, they claimed, because they mistakenly believed that their transactions fell outside the scope of Internal Revenue Code Section 1058, which provides for nonrecognition of gains or losses under certain circumstances. n105 The defense produced witnesses who testified that the firm’s interpretation of section 1058 was reasonable, but the district court ruled as a matter of law that the firm’s interpretation was incorrect. n106 Citing Cheek, the Second Circuit reversed, holding that the only relevant issue was whether the defendant’s belief was held in good faith. n107 The district court erred by not giving the jury a specific good faith instruction. n108 The appellate court reasoned that although the district court had given a “generalized” good faith instruction, the defendant-appellants, who were charged with sixty-four counts of tax, securities, and mail fraud, were entitled under Cheek to a clear instruction that a genuine, though incorrect, belief required an acquittal on the tax evasion charges. n109
In United States v. Pabisz, n110 the Second Circuit again reversed a district court decision. n111 Defendant Ronald Pabisz, an electrician, conducted his own legal research n112 and concluded that the law did not require him to file income tax returns or pay taxes. n113 As in Regan, an unclear jury instruction proved fatal. n114 The Second Circuit concluded that the given instruction could have “seriously misled the jury into believing that Pabisz’s good faith beliefs could negate the element of willfulness only if those beliefs were objectively reasonable.” n115 The court should have instructed the jury to consider whether Pabisz subjectively believed he was not obligated to pay taxes. n116
Unlike Cheek, however, the Second Circuit distinguishes between reckless ignorance and deliberate ignorance. While deliberate ignorance undercuts a good faith defense in the Second Circuit, reckless ignorance does not. n117 The Second Circuit upheld a district court’s instruction that “reckless ignorance of the tax law does not constitute willful intent to violate the law.” n118
In United States v. Fletcher, n119 the Second Circuit permitted the jury to rely on some objective factors when determining the defendant’s actual beliefs. n120 Because a jury cannot easily determine a defendant’s subjective belief, the trial court permitted the jury to consider the defendant’s education and training. n121 The defendant, an attorney with an accounting background, argued that such an instruction “invited a jury to infer his knowing membership in the conspiracy from what he ought to have known about the tax law.” n122 The Second Circuit, however, upheld the instruction in its entirety, reasoning that the trial court’s instruction adequately warned the jury that the Fletchers were guilty only if they knew their actions violated the law. n123
Other circuits have applied the Cheek rule differently. The Fifth Circuit, like the Second Circuit, permits a jury to consider the basis for the defendant’s good faith belief. The Fifth Circuit reasons that the Supreme Court’s Cheek decision “clearly anticipated and condoned the jury’s consideration of the bases upon which the defendant claims to have held his subjective belief.” n124 This rationale recognizes the practical difficulty in distinguishing between subjective and objective beliefs.
The Tenth Circuit, on the other hand, may actually prohibit the defendant from introducing evidence demonstrating the basis of his subjective beliefs. In United States v. Fingado, n125 the defendant testified that he sincerely believed he was not required to file tax returns. n126 He based his belief on materials he received at a seminar, a newspaper article, and a book entitled The Big Bluff, Tax Tyranny in the Guise of the Law, The Constitution v. The Tax Collector. n127 The district court, however, did not allow the jury to review the contents of the book n128 and the circuit court affirmed, a result which one commentator called “distinctly unfair.” n129
According to Cheek, true ignorance of the tax law is a defense. n130 Under the Tenth Circuit’s interpretation of Cheek, however, as in the Second Circuit, true ignorance of the tax law is a defense only if the ignorance is not deliberate. n131 Under a deliberate ignorance instruction, n132 the question is no longer simply “what did the defendant actually know?” but also “was the defendant deliberately ignorant?” With the inquiry into “deliberate ignorance,” the Tenth Circuit has transformed Cheek’s holding. A taxpayer who truly does not know he is breaking the law can still be found guilty if the jury decides that he purposely avoided learning the law. n133 This arguably sensible standard n134 limits the application of Cheek. According to the Tenth Circuit, ignorance of the law alone does not excuse the defendant from tax evasion. A taxpayer must also have never declined an opportunity to become knowledgeable. n135
As a practical matter, the court must give the jury something on which to base its determination other than the defendant’s testimony that he truly believed he complied with the law. Under Cheek, however, the court must carefully instruct the jury to ultimately inquire into what the defendant actually believed. n136 If the court permits the jury to consider evidence which does not directly relate to the taxpayer’s state of mind, the jury may inappropriately answer the wrong question. For example, in a case in which the court admits into evidence the defendant’s background as an accountant, the jury should consider that information only to the extent it bears on that particular defendant’s beliefs. This inquiry comes perilously close to the improper question of whether it is reasonable for an accountant to be unaware of the tax rule in question.
A proper instruction also makes it clear that a taxpayer may assert a good faith misunderstanding, but not a good faith disagreement with the law, as a defense. n137 If a defendant honestly holds a mistaken belief about the obligations imposed by the tax law, he has not acted willfully. n138
- Application of Cheek to Non-Tax Crimes
The Supreme Court once said that ” “willful’ is a word of many meanings, its construction often being influenced by its context.” n139 Judge Learned Hand has called it “one of the most troublesome words in a statute.” n140 The word so bedeviled the drafters of the Model Penal Code that they purposely excluded it. n141 In spite of this judicial trepidation, the term “willfully” appears throughout the criminal law, raising the question of whether the Supreme Court’s definition of “willfulness” in Cheek has any application outside of tax cases. Although non-tax cases frequently cite Cheek, generally only those charged with tax crimes have enjoyed the full protection of Cheek’s ignorance defense.
In United States v. Dockray, n142 the government charged the defendant with mail and wire fraud, an offense requiring proof of intent to defraud. n143 In defense, Dockray claimed that he acted in good faith. n144 He asked the judge to specifically instruct the jury that if they found that he truly, even if mistakenly, believed he was acting properly, they should find him not guilty. n145 The district court explained the requirement of intent to defraud to the jury, but did not use the words “good faith.” n146 The First Circuit affirmed, recognizing the good faith defense in mail fraud cases but holding that the words “good faith” were not magical and not required in the jury instruction. n147 The court said Cheek did not control because the issue in the instant case was whether the existence of the good faith defense had been adequately conveyed to the jury, a point which Cheek did not address. n148
One commentator asserts that in Dockray, the First Circuit took a “half step” in its “aggressive effort to limit the rule of Cheek” to tax evasion cases. n149 The court completed this step in United States v. Donovan. n150 In Donovan, the government charged a bank president with willfully failing to file currency transaction reports, which the law requires whenever a bank accepts any cash deposit exceeding $ 10,000. n151 The defendant argued that Cheek established a purely subjective test for every white collar crime which includes willfulness as an element of the offense. n152 Consequently, he asked for a Cheek jury instruction which would require the jury to exonerate him if they found that he honestly did not know that his failure to report the transaction violated the currency transaction report filing requirement, regardless of the reasonableness of his belief. n153
Rejecting the defendant’s argument, the court explicitly stated that Cheek applies only to tax crimes. n154 Calling Donovan’s interpretation of Cheek “distorted,” the First Circuit noted that “nowhere in Cheek, or in the Court’s earlier opinions involving criminal prosecutions under the tax laws, is there any indication that a purely subjective standard should be used in evaluating state-of-mind defenses in prosecutions under other federal statutes.” n155 In Cheek, the Court “crafted a narrow exception, limited to tax cases, in which subjective mistake of law can constitute an absolute defense.” n156 The Donovan court believed that Cheek’s rationale – that tax laws were complicated and difficcult to understand – did not apply to the bank’s filing requirements. n157
Thus, as subsequent non-tax decisions make clear, Cheek created a specific, narrow exception to the traditional common law principle that ignorance is no defense. Ignorance of the law is still no defense – unless the crime is tax evasion.
III. The Need for an Objective Standard
From a stare decisis perspective, the Supreme Court correctly decided Cheek. Supreme Court cases have long supported the notion that, in the tax law, “willfulness” means knowledge that one’s activity violates the law. n158 The Seventh Circuit, believing that the Supreme Court cases of Murdock, n159 Bishop, n160 and Pomponio n161 did not preclude an objective reasonableness instruction, n162 was clearly an aberration among the circuit courts, the rest of which applied a purely subjective standard. In Cheek, the Supreme Court clarified its position on the impropriety of an objective reasonableness instruction. n163 At the very least, the Cheek decision was consistent with previous Supreme Court interpretations of “willfulness.”
Although the Supreme Court has clearly defined willfulness, this definition is not necessarily optimal in terms of benefits to society and fairness to individual taxpayers. n164 So far, this Comment has attempted only to chronicle the development and application of the “willfulness” doctrine in federal tax law, before and after the Supreme Court’s decision in Cheek. In this section, however, this Comment argues that the Seventh Circuit’s pre-Cheek approach is superior to the present state of the law. Before a defendant should be permitted to claim mistake or ignorance as a defense, the law should require her to demonstrate that her mistaken belief or lack of knowledge was objectively reasonable. An unreasonable belief, even if sincerely held, should not serve as a defense to tax evasion.
Under this proposal, a taxpayer’s mistaken belief would excuse the taxpayer from criminal liability only if the belief is both objectively reasonable and sincerely held. Similar to a negligence standard, the law would presume the taxpayer to have at least a minimal knowledge of the tax law. This standard would not require taxpayer expertise or even familiarity with all aspects of tax law. It simply presumes that all Americans are aware that taxes exist and insists they take basic steps to learn the fundamentals, such as reading the IRS tax form instructions.
Using an objective reasonableness standard would bring tax law into alignment with other areas of criminal law. Also, an objective standard is fair to the defendant, it better prevents flagrant abuse of the tax system, and it would improve tax compliance. Congressional action, in the form of either replacing or redefining the word “willfully” in the Internal Revenue Code, could effectively realize the advantages that an objective approach would generate without upsetting a long line of Supreme Court jurisprudence.
- The Objective Standard Provides Consistency
Our fundamental sense of fair play insists that we treat similar situations similarly. The law, in its pursuit of justice, places a great premium on consistency. One of the oldest and best known principles of the American legal system is that ignorance of the law cannot serve as a defense for a criminal act. n165 As drafted by Congress and interpreted by courts, the Internal Revenue Code contains an unnecessary and ill-advised exception to this principle for tax crimes.
In Cheek, the Supreme Court failed to provide a logical basis on which to distinguish tax evasion from other types of crime, where citizens are presumed to know the law and act at their peril. Even if the courts could provide a distinction between common law crimes such as murder and more modern regulatory crimes, they have failed to provide a justification for applying one standard of willfulness to tax cases and a different standard of willfulness to other white collar crime cases.
The Supreme Court argues that the great complexity of the tax code justifies the tax crime exception. n166 However, complex laws govern other white collar crimes, and in these cases, the law does not excuse ignorance. Cheek gives special treatment to “ignorant” tax evaders. n167 Donovan makes clear that Cheek’s subjective test applies only to tax crimes. n168 Other white collar crime defendants can “willfully” violate a law even if they truly, subjectively believe they are faithfully complying with it. n169 Thus, “willfully” means one thing to a tax defendant and something else to a defendant accused of a different white collar crime.
The courts should not excuse taxpayer ignorance because of the complexity of the tax code. Other white collar crime statutes can be equally complex. n170 In Donovan, a bank president claimed to misunderstand the currency transaction recording requirements of 31 U.S.C. 5313(a); n171 in Cheek, an airline pilot claimed to misunderstand the law which says income is taxable. n172 While some provisions of the Internal Revenue Code are extremely complicated, the basic concepts of taxation that apply to most taxpayers are not. As one commentator writes, “if anything, the laws relating to money laundering, securities, and other “white-collar’ areas are more esoteric and more difficult to comprehend than the comparatively straightforward requirements concerning the reporting of wages as income and the payment of taxes.” n173
Tax statutes and white collar crime statutes arguably differ in one important respect: the types of people attempting to comply with them. Individuals who must comply with securities laws or bank recording regulations, for instance, usually possess some technical expertise as a result of their vocation. Individuals who must comply with tax laws often have no business background. This argument, however, does not justify the use of different standards. Courts should hold an individual responsible for knowing the laws governing that individual’s sphere of activity. The bank president bears the responsibility of operating a bank and complying with applicable laws, and the ordinary citizen bears the responsibility of paying taxes and following the Form 1040 instructions.
The criminal law currently applies the subjective standard only in tax cases, even though the special treatment of tax defendants has no logical foundation. The disparate treatment of tax crime defendants and other white collar crime defendants is unfair because it is based on transparent distinctions. Using an objective standard in both instances would make the law more consistent, and therefore more just.
- The Objective Standard Provides Fairness
John Cheek’s Seventh Circuit brief analogizes his indoctrination into a tax protest group to the foibles of a naive fraud victim who is taken in by a smooth-talking “con man.” n174 Cheek compares the tax protestors who persuaded him that their beliefs were true to “snake-oil salesmen of lore” and argues that he “bought their desert real estate and their wellness potions.” n175 Unlike the sucker who buys snake-oil, however, John Cheek and the others directly benefitted from being “taken in.” Because he benefitted, the law need not sympathize with him as though he were a victim. Cheek and other tax protestors more closely resemble a person who buys a new color television set from the back of a truck in an alley for twenty dollars. Despite suspicions about the legitimacy of the sale and the television’s origin, the purchaser keeps the television and remains silent.
Critics of the pre-Cheek Seventh Circuit objective standard contend that it unfairly punished taxpayers who made innocent, honest mistakes. Even though the objective standard only punishes unreasonable mistakes, critics fear that the courts will jail “honest and sincere persons whose legal sophistication fails to reach some judicially-created standard.” n176 The judicially created standard of reasonableness, however, can be set at a level which ensures that those who make an effort to reach it will succeed. The fishnet can be dropped low enough to capture only the bottom-dwellers.
An objective standard would impose a duty on taxpayers to know the fundamental concepts of the tax law. It would not require the taxpayer to understand all the nuances of the tax code. The law would simply presume that all citizens know that a tax system exists which requires taxpayers to pay income taxes, just as it presumes that everyone who drives a car knows the traffic laws. For example, a taxpayer’s honestly held but mistaken belief that she may deduct all of her capital losses would qualify as reasonable; n177 John Cheek’s honestly held but mistaken belief that wages are not income would not.
The presumption that citizens are aware of tax filing requirements does not unduly burden taxpayers. If death and taxes are the only two sure things in life, it seems only natural to presume that adults are aware of each.
In his brief, Cheek criticized the Seventh Circuit for using a standard under which taxpayers with questions or confusion about their tax obligations act at their peril. n178 Forcing taxpayers to act at their peril is, if anything, an advantage of the Seventh Circuit objective approach. When faced with an objective standard, a taxpayer who is uncertain about his obligations under the law will either carefully read his instructions, seek advice from a professional or obtain free assistance from the IRS. If the same confused taxpayer is not forced to act “at his peril,” instead of taking steps to inform himself, he may simply assume that the correct answer to his tax question is the one which most reduces his tax liability.
Congress should give the taxpayer the benefit of the doubt, defining reasonableness broadly so as to allow all but the most outrageous mistakes as a defense. In practice, almost nobody would fall into the crack between the objective and subjective standards. There is the discomforting possibility, however, that under the objective standard a taxpayer who truly wanted to do the right thing could make an honest mistake which is deemed unreasonable – and by implication, criminal – by a jury..
There are two safeguards, however, which would prevent this unfortunate result. The first is IRS discretion in deciding which taxpayers to prosecute. The objective standard gives the IRS a powerful weapon because the standard makes it easier to convict tax evaders. Because the IRS operates with limited resources of time and money, however, it probably will not try to use this weapon in marginal cases, where the taxpayer’s mistake looks honest even if it does not look reasonable.
The second safeguard is that in practice, the same outcome will usually result regardless of the chosen standard. Even when the court instructs the jury to use the subjective standard and to determine what the defendant actually believed, the jury often uses an objective standard anyway. Under Cheek, juries may consider the reasonableness of the belief, but only as it pertains to the ultimate issue of the defendant’s subjective belief. n179 As the Court put it, “the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties.” n180 When the jury tries to look into the defendant’s mind, the reasonableness of the claimed beliefs will inevitably enter the calculation.
At worst, the objective standard would create uncertainty. “Reasonableness” is impossible to define clearly and could vary, depending on the particular case and jury. As one court said, however, “uncertainty is a fact of legal life. “The law is full of instances where a man’s fate depends on his estimating rightly, that is, as the jury subsequently estimates it, some matter of degree.’ ” n181
In Cheek, the Supreme Court quoted an earlier case which said, “it is not the purpose of the law to penalize frank differences of opinion or innocent errors made despite the exercise of reasonable care.” n182 This statement implies that when reasonable care is not exercised, the law may penalize even innocent errors. An objective standard does precisely that, without unfairly burdening taxpayers.
- The Objective Standard Prevents Abuse of The System
This analysis has, until this point, assumed that the defendant taxpayer truly holds an unreasonable belief about his income tax obligations. One of the most compelling reasons to move away from the subjective standard of Cheek, however, is to enable effective prosecution of those who do not “truly” hold their mistaken beliefs – those who either consciously cheat on their taxes or intentionally avoid learning the applicable rules and then feign ignorance when caught. Most taxpayers do not realize that the “ignorance of the law is no excuse” maxim does not apply to tax law. n183 As a result, the ignorance defense is most often invoked by sly taxpayers who are well aware of the heavy burden the government bears in tax crime prosecution. n184
The objective standard would add another hurdle for manipulative taxpayers to clear before the law exonerates them. The Seventh Circuit used the objective approach, in large part, for this reason. The Cheek decision, in overruling the Seventh Circuit, invites abuse.
Allowing ignorance as a defense without regard to reasonableness creates undesirable incentives. The law encourages taxpayer ignorance, because the prosecution can use a taxpayer’s knowledge against him. n185 In Cheek, the Court noted that the jury could consider evidence showing that Cheek was aware of his tax obligations. n186 This would include evidence that the taxpayer knew of the relevant Internal Revenue Code provisions, court decisions rejecting the taxpayer’s interpretations, IRS rulings, and the contents of the personal income tax return forms and instructions. n187 Under this rule, a taxpayer wishing to pay as few taxes as possible should ignore all mail from the IRS. The IRS could later use the fact that the defendant read the 1040 instructions as evidence of the taxpayer’s subjective awareness of the law. n188 As a result, a taxpayer who reads the instructions and still makes a mistake will have difficulty demonstrating ignorance. n189 A taxpayer who is truly confused about the rules would be better off taking a wild guess, filing a return, and later pleading ignorance if the guess proves inaccurate. Under the subjective standard, having knowledge of the tax law can only work against a defendant. Consequently, this standard creates an enormous disincentive for a taxpayer to learn about tax obligations.
The objective standard, on the other hand, provides an incentive for the taxpayer to learn. To escape criminal liability, the taxpayer need not hold completely accurate beliefs, but she must hold reasonable beliefs. A taxpayer who generally familiarizes herself with the tax rules, understands her obligation to file a return, and makes an honest attempt to comply should have little difficulty meeting this standard. As the Seventh Circuit summarized this principle, “if the legal system either refuses to recognize a mistake of law as a defense (the usual rule) or accepts only a reasonable mistake as a defense (our rule in tax cases), this leads people to learn and comply with the law.” n190
The subjective standard also encourages defendants to lie to the jury. Since the case focuses on the defendant’s state of mind at the time of the alleged transgression, the defendant’s personal testimony becomes extremely important. Although the subjective standard permits the jury to consider objective factors, n191 the jury must ultimately determine what the taxpayer actually believed. Because corroborating evidence on this question is understandably hard to produce, the jury might not demand any, and instead place great weight on the defendant’s explanation. A skillful liar thus has a better chance of acquittal in a tax case than in non-tax criminal cases, where the prosecution has greater opportunity to present evidence contradicting the defendant’s testimony.
The nature of tax crime especially tempts a defendant to lie, not only because it is in the offender’s best interest and is likely to work, but because, in the offender’s mind, it is easy to justify from a moral standpoint. Tax evaders often rationalize non-compliance on the grounds that the government wastes tax dollars anyway, that loopholes unfairly allow others to avoid taxes, or that failure to comply does not really hurt anyone. n192 Ordinarily law-abiding citizens, whose personal moral codes would prevent them from committing other crimes or lying about it afterwards, might intentionally violate tax laws and then lie to a jury without even flinching.
The objective standard allows the jury to evaluate a defendant’s testimony against a backdrop of reasonableness. As the Seventh Circuit explains, “the reasonableness requirement is intended to give the jury a method by which they can distinguish between a bona fide misunderstanding of the law and obdurate refusal to acknowledge … what the law indeed does require.” n193 Thus, the defendant needs more than a convincing lie to avoid punishment. In addition to convincing a jury that his mistaken belief was truly held, a taxpayer using this defense must convince the jury that the belief was reasonable.
In addition to encouraging ignorance of the law and deception, the subjective standard encourages people to lie to themselves. n194 If a taxpayer can convince herself that her view of the tax law, no matter how mistaken, is correct, she technically has not committed a crime. In many cases, this self-persuasion will not prove too difficult a task. Most taxpayers are probably all too eager to believe whatever interpretation will reduce their taxes the most. As the Seventh Circuit summarized, “limiting the ignorance defense in tax cases is essential because the desire to keep as much of one’s income as possible would supply an irresistible temptation to be obtuse about the law, if obtuseness eliminated the duty to pay.” n195
Critics of the objective standard have argued that the Seventh Circuit fashioned its doctrine solely out of frustration with the tax protest movement. n196 While this charge may have merit, it does not follow that the Seventh Circuit standard is improper. On the contrary, destruction of the tax protest movement is an advantage of the objective standard. The fact that the development of the doctrine might have been driven by the Seventh Circuit’s desire to discourage “tax protest” n197 makes it no less desirable in other circumstances.
By some estimates, there are over 13,000 tax protestors in the United States. n198 They call themselves “great American heroes,” n199 and they conduct seminars to teach their followers, among other things, that the Sixteenth Amendment is unconstitutional. n200 They instruct followers to claim hundreds of dependents on their W-4s, thereby preventing income from being withheld n201 and to file frivolous tax returns. n202 They encourage followers to obtain a jury trial so that sympathetic jury members will acquit after the jurors themselves are indoctrinated into the tax protest movement n203 during the course of the trial. n204 True “tax protestors” are not really ignorant of the law; they simply disagree with it. Because disagreement with the law is not a defense under Cheek, n205 the tax protestor should in theory be found guilty under either the objective or subjective standard. In practice, however, tax protestors are much more difficult to convict under the subjective standard. Since the reasonableness of the “mistake” is irrelevant under the subjective standard, a defendant tax protestor can escape conviction by successfully feigning ignorance.
Tax protestors hold various beliefs about taxation, few of which are objectively reasonable. One defendant, for instance, said he failed to pay taxes because he believed that IRS agents were “Satan’s little helpers.” n206 Whatever their belief, tax protestors do not pay taxes and jam court dockets with frivolous litigation. Tax protestors drain judicial resources which could be better spent elsewhere. Tax dollars are lost at both ends: revenues lost because protestors do not pay taxes, and revenues spent bringing them to justice. n207
Tax protestors thrive under a subjective standard. They wither, however, under a standard which requires their beliefs to be reasonable. n208 An objective standard gives the IRS an effective tool in its pursuit of those tax evaders who routinely shirk their tax responsibilities. If the law defines reasonableness broadly enough, truly innocent taxpayers will not be convicted.
The case of John L. Cheek illustrates the need for an objective standard. A sophisticated commercial airline pilot claims to believe that his wages are not income and that he has over fifty dependents. n209 Were these beliefs objectively reasonable? Certainly not. Were they truly held? Given the fact that for most of his adult life, Cheek had properly filed his tax returns, it is hard to believe that he was genuinely unaware of his obligations. A more plausible explanation is that John Cheek was nothing more than a tax protestor who disagreed with the tax laws. At least two district court jurors, however, were convinced that he sincerely held his unreasonable beliefs. n210 Under a subjective standard, Cheek would have probably been acquitted at the trial level.
As Justice Blackmun suggests in the Cheek dissent, there are certain things that every person of minimum intellectual competence knows. n211 The dispute in Cheek did not involve complex tax law, but “the income tax law in its most elementary and basic aspect: Is a wage earner a taxpayer and are wages income?” n212 If Cheek could escape criminal sanctions, it is difficult to conceive of a defendant who would not.
- The Objective Standard Would Improve Tax Compliance
The “tax gap” statistic refers to the difference between the revenues actually collected by the IRS and the revenues which the IRS would collect if every citizen filed an accurate tax return. n213 According to IRS estimates, the gap in the United States is over $ 80 billion annually. n214 Using an objective standard would help to bridge this “gap.”
The Internal Revenue Code views criminal sanctions as merely the “capstone” n215 of an elaborate enforcement system which utilizes a variety of civil remedies, including fines and penalties. n216 The IRS may apply these penalties to taxpayers who do not comply with the law, even if the taxpayer did not act “willfully” as defined by the Supreme Court. In a “voluntary” n217 compliance system like the one in the United States, the law must give taxpayers strong incentives to comply.
Empirical evidence suggests that criminal punishment serves as a powerful deterrent to tax evasion. n218 Given the infrequency of IRS audits and the correspondingly high probability that a tax evader will escape detection, the law should make the consequences for those who are caught especially dire. Civil penalties have questionable deterrent effect, since they merely involve a financial transaction between the transgressor and the IRS. A potential tax evader may perceive his choice as either dutifully paying now or paying only when and if he gets caught. Although financial penalties are levied on top of the amount the tax evader would have paid had he complied, n219 tax evasion becomes a rational gamble. Facing the possibility of imprisonment and the stigma of a criminal label, however, the risk calculus changes.
Because revenue collection in a voluntary system depends so heavily on taxpayer cooperation, the law should not allow ignorance as a defense. n220 An objective standard encourages taxpayers to learn and follow the law. If a taxpayer knows the IRS is watching and will press criminal charges unless he acts reasonably, he will be all the more inclined to look up the rule in question. Under a purely subjective standard, where ignorance is bliss, that same taxpayer may simply assume that the rule works in his favor. After all, what he does not know cannot hurt him.
One commentator has suggested that the Internal Revenue Code incorporate a standard of “recklessness.” n221 Under this approach, a taxpayer could be prosecuted even if he did not behave willfully. n222 This standard, however, encounters many of the same pitfalls as the subjective standard. A “recklessness” standard still accepts ignorance of the law as a defense unless the taxpayer was reckless. n223 Therefore, it still provides inappropriate incentives for a taxpayer to avoid knowledge of the law, so long as the taxpayer’s avoidance of knowledge never crosses the line into “recklessness.” Moreover, it would continue to unduly hamper the prosecution of tax protestors. John Cheek’s beliefs, for example, were unreasonable, but was he reckless? The “recklessness” standard offers an unnecessary and potentially confusing compromise.
The recklessness standard attempts to accommodate the honest, but unreasonable, taxpayer who would be guilty under an objective standard. A taxpayer, however, should have an affirmative duty to obtain a reasonable understanding of his income tax obligations. A truly “honest” taxpayer will do more than just refrain from recklessness. A truly honest taxpayer will take her income tax responsibilities seriously enough to read the Form 1040 instructions and conscientiously follow them each year.
In United States v. Cheek, the Supreme Court made it clear that the traditional maxim “ignorance of the law is no defense” does not apply to tax crimes. n224 A taxpayer may behave outrageously, even to the point of not paying any taxes, without criminal penalty, as long as the taxpayer subjectively believes he is obeying the law. n225
The message to would be tax evaders is clear: If you don’t know anything about taxes, you can’t be guilty of tax crime. Don’t learn, because knowledge can only be used against you. If an armed robbery defendant cried “I forgot armed robbery was illegal,” n226 society would scornfully convict him. Failing to convict in such a case would allow that individual’s beliefs to trump the law itself. n227 Yet the tax defendant who pleads, “I didn’t know that my wages were income” escapes punishment. n228 His belief becomes reality. Under the current, subjective standard of willfulness, it is not a crime to avoid paying taxes as long as the taxpayer does not believe it is a crime. The tax law to which most Americans attempt to faithfully adhere is robbed of its power. A standard of objective reasonableness, when used in careful conjunction with the standard of subjective belief, can untwist this perversity. Congress should redefine the willfulness standard to include taxpayers who avoid filing returns or file inaccurately in reliance upon objectively unreasonable mistakes.
While some areas of the tax law are complicated, the fundamental concept is really quite simple: Those who earn income must pay taxes. The IRS, in fact, tries to simplify the tax laws and even provides free assistance to those who request it. n229 The tax law is not complex enough to justify a departure from one of the oldest and most sensible principles of common law. Ignorance should not be rewarded; it should be punished. Ignorance should not be bliss; it should be perilous.
Mark C. Winings