Affirmative Acts: The Line Between a Misdemeanor and a Felony

Here is a question that sounds academic and is not. If someone willfully fails to file a tax return and willfully fails to pay the tax, have they committed tax evasion?

The Supreme Court answered it in 1943, and the answer still shapes every evasion case: no, not by itself. Evasion requires something more, an affirmative act. Understanding what counts as an affirmative act explains why some cases are charged as misdemeanors, why others are charged as felonies, and why the IRS fraud manual is organized the way it is.

This is general legal information about a published Supreme Court decision and IRS procedures. It is not a description of any person's case beyond what the opinion itself says.

The case: Spies v. United States

In Spies v. United States, 317 U.S. 492 (1943), the defendant was convicted of attempting to defeat and evade income tax under the predecessor to today's section 7201. According to the opinion, he admitted at trial that he had enough income to require a return and payment, and that he did neither. His defense centered on lack of willfulness.

The trial judge told the jury it could find an attempt to evade based on willful failure to file plus willful failure to pay, and refused an instruction that an affirmative act was necessary. The judge also instructed that "an attempt may be found on the basis of inactivity or on refraining to act, as well."

The Supreme Court reversed.

What the Court held

Justice Jackson's opinion looked at the structure of the penalties. Willful failure to file a return and willful failure to pay tax were each made misdemeanors. Willfully attempting to evade or defeat tax was made a felony. The Court said it "would not readily assume that Congress by the felony ... meant no more than the same derelictions it had just defined ... as a misdemeanor."

The difference, the Court concluded, "is found in the affirmative action implied from the term 'attempt.'" Congress "intended some willful commission in addition to the willful omissions that make up the list of misdemeanors." In the Court's words: "Willful but passive neglect of the statutory duty may constitute the lesser offense, but to combine with it a willful and positive attempt to evade tax in any manner or to defeat it by any means lifts the offense to the degree of felony."

The Court was also careful about nonpayment alone. Citing the "traditional aversion to imprisonment for debt," it said it would not assume, without the clearest congressional intent, that a knowing and intentional default in payment, where the liability was not concealed, was meant to be a crime of any degree without some element of evil motive.

The list

Then came the paragraph that has been quoted ever since. The Court declined to define the methods of evasion, because Congress said "in any manner." But by way of illustration, and not limitation, it said affirmative willful attempt may be inferred from conduct such as:

• keeping a double set of books,
• making false entries or alterations, or false invoices or documents,
• destruction of books or records,
• concealment of assets or covering up sources of income,
• handling one's affairs to avoid making the records usual in transactions of the kind, and
• "any conduct, the likely effect of which would be to mislead or to conceal."

Two more sentences matter. First: "If the tax-evasion motive plays any part in such conduct the offense may be made out even though the conduct may also serve other purposes such as concealment of other crime." Second, on the evidence in the case itself, the Court described the government's claims that the defendant insisted on being paid certain income in cash, moved it to his bank by armored car, deposited it in the names of family members, and kept inadequate and misleading records. The Court said whether those acts showed an attempt to evade was for the jury, and that the defendant was entitled to an instruction requiring proof beyond the misdemeanor elements.

How the IRS uses the concept today

The IRS fraud manual builds directly on the idea. IRM 25.1.1.3.3 says evasion "involves some affirmative act to evade or defeat a tax, or payment of tax," with examples including "deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are."

IRM 25.1.1.4 draws the distinction that runs through every fraud case. Indicators of fraud are signs or symptoms. Affirmative acts, which the manual also calls firm indications, are "actions that establish that a particular action was deliberately done for the purpose of deceit." The manual's bottom line: "Fraud cannot be established without affirmative acts of fraud." Its examples include deliberate omission of specific items where similar items are included, concealment of bank accounts or other assets, willful failure to deposit receipts to business accounts, and covering up sources of receipts.

That distinction drives the internal process. An examiner can put a case in fraud development on indicators, but a referral to Criminal Investigation on Form 2797 requires a description of the firm indications. See when an audit turns criminal and badges of fraud.

Why it matters which side of the line you are on

The practical stakes are large.

The charge. Willful failure to file or pay under IRC 7203 is a misdemeanor with a maximum of 1 year of imprisonment. Evasion under IRC 7201 is a felony with a maximum of 5 years. See willful failure to file under section 7203 and tax evasion under section 7201.

The civil consequences. A section 7201 conviction collaterally estops the taxpayer from disputing civil fraud for the convicted years, under IRM 25.1.6.5.

Bankruptcy. Under 11 U.S.C. 523(a)(1)(C), a tax is not dischargeable if the debtor willfully attempted in any manner to evade or defeat it. That is the evasion standard, imported into bankruptcy.

Willfulness still has to be proved

An affirmative act is necessary, but not sufficient. The government must also prove willfulness. In Holland v. United States, 348 U.S. 121, the Supreme Court accepted the defendants' statement that willfulness "involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income," while holding that evidence of a consistent pattern of underreporting large amounts of income, together with failure to include all income in the books, could support the inference. See willfulness in criminal tax cases.

Affirmative acts in payment cases

The Spies list is not limited to hiding income. Section 7201 also reaches attempts to evade "the payment" of tax, and the affirmative acts in those cases tend to involve assets. The IRS indicators of fraud in IRM 25.1.2.3, under methods of concealment, include asset ownership placed in other names, transfers of all or nearly all of a debtor's property, retention of possession or continued use of a transferred asset, deposits into accounts under nominee names, and business transactions conducted in false names.

Conduct after the fact counts too

The Spies list is not limited to what happened on the return. Destroying records and concealing assets can happen years later, in response to an audit or a collection action. The IRS fraud manual lists destruction of records "especially if just after examination was started," and transfers of assets "in anticipation of a tax assessment or while the investigation of a deficiency is pending," as indicators in IRM 25.1.2.3.

In other words, the way someone reacts to IRS contact can supply the affirmative act that was missing before. That is why the first call should be to a lawyer, and why records should be preserved, not rearranged.

One more point from Spies deserves emphasis. The Court said a defendant is entitled to a jury instruction requiring an inference of willful attempt to evade "from some proof in the case other than that necessary to make out the misdemeanors," and that if the evidence does not support that inference, "the defendant should be acquitted" of the felony.

General information only, not legal advice. Reading this page does not create an attorney-client relationship. Laws and IRS procedures change; the sources cited were reviewed on the date shown above.