California Tax Fraud and Evasion

California Tax Fraud and Evasion

When a person violates the California Revenue and Tax Code, oftentimes it will be a civil violation and not a criminal violation. But, similar to the Internal Revenue Code, when a person violates the California tax fraud or evasion statute, they may become subject to criminal liability — which may include penalties as well as incarceration. In California, the fraud and tax evasion statutes can be found under the Revenue and Tax Code Sections 19705 and 19706. Let’s take a walk through California’s version of the tax fraud and evasion statutes.

Tax Fraud and Tax Evasion

When it comes to California tax fraud and tax evasion, the roads are a bit different than at the Federal level. While tax evasion at the federal level can be either a misdemeanor or a felony, tax fraud at the California level is typically a felony. Similarly, while tax evasion at the federal level is a felony, at the state level it is a wobbler – which means it can either be a misdemeanor or it can be a felony. Let’s being with California RTC 19705:

California RTC 19705 (Felony)

• Any person who does any of the following shall be guilty of a felony and, upon conviction, shall be fined not more than fifty thousand dollars ($50,000) or imprisoned pursuant to subdivision (h) of Section 1170 of the Penal Code, or both, together with the costs of investigation and prosecution:

  • (1) Willfully makes and subscribes any return, statement, or other document, that contains or is verified by a written declaration that it is made under penalty of perjury, and he or she does not believe to be true and correct as to every material matter.

  • (2) Willfully aids or assists in, or procures, counsels, or advises the preparation or presentation under, or in connection with any matter arising under, the Personal Income Tax Law or the Corporation Tax Law, of a return, affidavit, claim, or other document, that is fraudulent or is false as to any material matter, whether or not that falsity or fraud is with the knowledge or consent of the person authorized or required to present that return, affidavit, claim, or document.

  • (3) Simulates or falsely or fraudulently executes or signs any bond, permit, entry, or other document required by the provisions of the Personal Income Tax Law or the Corporation Tax Law, or by any regulation pursuant to that law, or procures the same to be falsely or fraudulently executed or advises, aids in, or connives at that execution

  • .(4) Removes, deposits, or conceals, or is concerned in removing, depositing, or concealing, any goods or commodities for or in respect whereof any tax is or shall be imposed, or any property upon which levy is authorized by Chapter 5 (commencing with Section 19201); or Chapter 8 (commencing with Section 688.010) of Division 1 of, and Chapter 5 (commencing with Section 706.010) of Division 2 of, Title 9 of the Code of Civil Procedure, with intent to evade or defeat the assessment or collection of any tax, additions to tax, penalty, or interest imposed by Part 10 (commencing with Section 17001), Part 11 (commencing with Section 23001), or this part.

  • (5) In connection with any settlement under Section 19442, or offer of that settlement, or in connection with any closing agreement under Section 19441 or offer to enter into that agreement, or compromise under Section 19443, or offer of that compromise, willfully does any of the following:

    • (A) Conceals from any officer or employee of this state any property belonging to the estate of a taxpayer or other person liable in respect of the tax.

    • (B) Receives, withholds, destroys, mutilates, or falsifies any book, document, or record, or makes any false statement, relating to the estate or financial condition of the taxpayer or other person liable in respect of the tax.

      • (b) In the case of a corporation, the fifty thousand dollars ($50,000) limitation specified in subdivision (a) shall be increased to two hundred thousand dollars ($200,000)

      • (c) The fact that an individual’s name is signed to a return, statement, or other document filed, including a return, statement, or other document filed using electronic technology pursuant to Section 5, shall be prima facie evidence for all purposes that the return, statement, or other document was actually signed by him or her.

      • (d) For purposes of this section, “person” means the taxpayer, any member of the taxpayer’s family, any corporation, agent, fiduciary, or representative of, or any other individual or entity acting on behalf of, the taxpayer, or any other corporation or entity owned or controlled by the taxpayer, directly or indirectly, or which owns or controls the taxpayer, directly or indirectly.(e) The changes made to this section by the act adding this subdivision apply to offers made on or after January 1, 1999.

Subdivision (h) of Section 1170 of the Penal Code

In looking at the code section 19705, it specifically refers to section 1170 of the Penal Code for sentencing. Section 1170 of the penal code (h) provides the following:

• • • (h)(1) Except as provided in paragraph (3), a felony punishable pursuant to this subdivision where the term is not specified in the underlying offense shall be punishable by a term of imprisonment in a county jail for 16 months, or two or three years.

California Tax Evasion: RTC 19706 (Wobbler)

As mentioned above, the crime of tax evasion in California is actually a wobbler crime which means the government has the opportunity either prosecuted as a misdemeanor or as a felony.

• • • Any person or any officer or employee of any corporation who, within the time required by or under the provisions of this part, willfully fails to file any return or to supply any information with intent to evade any tax imposed by Part 10 (commencing with Section 17001) or Part 11 (commencing with Section 23001), or who, willfully and with like intent, makes, renders, signs, or verifies any false or fraudulent return or statement or supplies any false or fraudulent information, is punishable by imprisonment in the county jail not to exceed one year, or in the state prison, or by fine of not more than twenty thousand dollars ($20,000), or by both the fine and imprisonment, at the discretion of the court, together with the costs of investigation and prosecution.

California Tax Evasion May Not Require an Affirmative Act

One of the most important aspects of tax evasion at the federal level is that in order to prove that the crime occurred, the government must show that the Defendant acted willful act in addition to the other elements, including an ‘affirmative act.’ Generally, this means that if a person simply does not file a tax return then it would not violate the tax evasion statute because there is no affirmative act. In other words, the failure to file a tax return does not amount to an affirmative act — at the Federal Level. But, under California law the rules are different as was the case in Hudson. While there was no affirmative act per se, it should be noted that there were multiple years of non-compliance. Let’s look at some of the key excerpts from that ruling:

No Affirmative Act: Hudson v. Superior Court of Orange Cnty.

• • • “In a felony complaint, the prosecution charged Hudson with three counts of willfully failing to timely file tax returns for three consecutive years with the intent to evade paying a tax. (§ 19706.) A magistrate presided over a preliminary hearing in which an FTB agent testified as the prosecution’s sole witness. The agent testified that generally a person must file tax returns by either April 15, or October 15, for the prior taxable year.

    • For each of the three years, the FTB had mailed Hudson a “Demand for Tax Return,” asking him to file his returns. According to the FTB agent, the FTB also mailed Hudson: 1) a letter telling him that they would publicly disclose him as one of the 500 largest tax delinquents in the state; 2) a notice of proposed assessment; and 3) a notice of collection. Further, the FTB agent prepared a document showing that Hudson “had a filing history,” meaning he had filed returns and had paid his taxes in other years.

    • It is important to keep in mind that a person’s intent “is a question of fact to be determined from all the circumstances of the case, and usually must be proven circumstantially.” (See People v. Fujita (1974) 43 Cal.App.3d 454, 469, 471, 117 Cal.Rptr. 757 [conspiracy to commit theft may be inferred from the close association of those promoting an illegal scheme]; see also In re Leanna W. (2004) 120 Cal.App.4th 735, 741, 15 Cal.Rptr.3d 616 [in a burglary charge the “theft of property from a dwelling may create a reasonable inference that there was intent to commit theft at the time of entry”].) “

    • In every crime or public offense there must exist a union, or joint operation of act and intent….” (Pen. Code, § 20.)Again, what is at issue in this case is Hudson’s failure to timely file tax returns “with intent to evade any tax.” (§ 19706, italics added.) The word “evade” is a synonym for “avoid,” “elude,” or “get out of.” (Roget’s International Thesaurus (4th ed. 1977) p. 486; compare Civ. Code, § 1714.41 [assisting a person who seeks to “escape, evade, or avoid” paying child support].) There is no indication that the Legislature intended the word “evade” to have any technical meaning peculiar to the law. (See CALCRIM No. 200 [“Words and phrases not specifically defined in [jury] instructions are to be applied using their ordinary, everyday meanings”].)

    • Hudson argues that in order to sustain a magistrate’s ruling under section 19706, the prosecution—in addition to showing a failure to timely file a tax return—is required to show that the defendant committed an affirmative act of fraud (such as concealing information or creating false documents). But Hudson’s argument fundamentally confuses the necessary mens rea of section 19706 (an intent to evade paying taxes) with the necessary actus reus (a failure to timely file a return). An additional affirmative act of fraud is simply not required under section 19706.

    • Here, it is undisputed that Hudson willfully failed to timely file his tax returns. And, as we already discussed, there was some evidence that Hudson did so with the intent to evade paying his taxes. Accordingly, the evidence is sufficient to sustain the magistrate’s ruling and the superior court’s denial of his Penal Code section 995 motion. Thus, Hudson’s petition for a writ of prohibition and/or mandate must be denied.

    • Hudson relies on Spies , a United States Supreme Court decision interpreting a federal tax evasion law to support his argument that an additional affirmative act of fraud is required under section 19706. (Spies , supra , 317 U.S. 492, 63 S.Ct. 364.) But generally, a decision of the United States Supreme Court based solely on federal law is not binding on state courts in the interpretation of state law. (See People v. Guiton (1993) 4 Cal.4th 1116, 1126, 17 Cal.Rptr.2d 365, 847 P.2d 45.) And more specifically in this case, Spies is inapposite because the federal tax evasion law analyzed in Spies —unlike section 19706 —does not explicitly make the willful failure to file a tax return a criminal act.

    • Here, under California law—unlike the ambiguous federal tax evasion law interpreted in Spies —the Legislature has explicitly stated what criminal act is required to be shown under section 19706. The required actus reus is the willful failure of a person to timely file a tax return—an omission or a negative act—along with the intent to evade the taxes that are due. Thus, the Spies holding, in so far as it requires an additional affirmative act of fraud under the federal tax evasion law, is inapposite and has no bearing on our analysis.”

International Tax Compliance

In recent years, both the US government California government have significantly increased enforcement of international and offshore tax related compliance matters. The failure to properly file and report global assets and income may result in fines and penalties. It is important for taxpayers who have international income and reporting requirements to ensure they are in compliance with both federal and California tax laws.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.