Tom Talks Taxes - June 23, 2023

What tax crimes did Hunter Biden commit?

The son of President Joe Biden, Hunter Biden, pled guilty to tax crimes as part of a plea agreement with federal prosecutors. This article has copies of the charging documents filed in federal court.

The charging documents allege two misdemeanor violations of §7203 for Biden’s failure to pay his 2017 and 2018 Form 1040 balances due timely. In both years, he had income exceeding $1.5 million and unpaid tax on that income exceeding $100,000 and did not pay the tax owed on or before April 17, 2018 (for the 2017 return) and April 15, 2019 (for the 2018 return).

Millions of taxpayers fail to file and/or pay their federal taxes on time. Why was Hunter Biden charged with this crime but not your delinquent client?

§7203 provides for criminal penalties for several types of noncompliance with the Internal Revenue Code:

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.

The key term in the statute is willfully. A failure to file a return or pay any tax due does not rise to a criminal offense unless it was willful. It is probably no surprise to a reader of Tom Talks Taxes that there is no statutory or regulatory definition of willful.

In U.S. v. Pomponio, 429 U.S. 10 (1976), with respect to a charge of willfully filing false income tax returns under §7206(1), the Supreme Court said that willfulness is “a voluntary, intentional violation of a known legal duty.” That definition applies to both the misdemeanor and felony provisions of the Internal Revenue Code.

The jury instruction at issue in Pomponio, which the Supreme Court upheld, stated that a willful act is one done "voluntarily and intentionally and with the specific intent to do something which the law forbids, that is to say with [the] bad purpose either to disobey or to disregard the law" and that “[g]ood motive alone is never a defense where the act done or omitted is a crime.”

Prosecutions for willful failure to pay tax under §7203 are uncommon. Internal Revenue Manual 9.1.3.3.4.1.3.1 (05-15-2008) provides insight into when willfulness may be established for this crime:

Although an additional tax due is not an essential element of the offense, willfulness is difficult to establish without proof of a substantial tax liability.

When charging willful failure to pay tax, repeated failure to pay taxes, coupled with large expenditures for luxuries when taxes were owing, may be evidence of willfulness within the meaning of the statute.

Ultimately, for any tax crime, both IRS Criminal Investigation and the Department of Justice Tax Division have discretion as to which matters will be criminally charged. There are limited resources to investigate and/or prosecute tax crimes; therefore, not every taxpayer who fails to file a tax return or pay tax, even willfully, will be selected for criminal prosecution.

For example, a taxpayer is more at risk of being charged with willful failure to pay tax if they are a “won’t pay” taxpayer (i.e., the taxpayer has the assets to pay the tax, but refuses to do so) compared to a “can’t pay” taxpayer (i.e., the taxpayer does not have sufficient assets to pay the tax).

Other factors considered include, but are not limited to, the following:

Is the target well-known? A well-publicized tax prosecution can be used as an incentive to encourage voluntary compliance with the law.

Did the target commit other potential crimes, either tax or non-tax related? This makes it more likely for the tax crimes to be charged.

Is there a history of noncompliance with the law? A one-off failure is unlikely to be prosecuted unless it is particularly egregious.

What is the potential tax loss? The larger the tax loss, the longer the potential sentence for the crime.

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