Ignorance is bliss, especially for the tax evader.

• Author: Winings, Mark C.

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."(1)

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.(2) Other defenses include believing that wages are not income or that paper currency is not money.(3) 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.(4) In Cheek v. United States, the United States Supreme Court interpreted "willfully" as the taxpayer's actual knowledge that his actions violate the law.(5) One who avoids taxes can avoid conviction by demonstrating his truly held belief that he owes no taxes.(6) Moreover, the jury may not consider the reasonableness of this belief.(7)

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.

1. DEVELOPMENT OF THE "WILLFULNESS DOCTRINE"

   1. 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.(8) 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.(9) 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.(10) The tax law, however, renders the distinction meaningless, because either type of mistake exculpates the defendant if honestly, even though unreasonably, made.(11) 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.(12) This rule usually applies regardless of the severity of the crime, and even if the entire community holds the mistaken belief.(13) Commission of a crime requires both a criminal act and a criminal intent, although the defendant need not specifically intend to break the law.(14) 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.(15)

      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.(16) 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.(17)

      By establishing the rule that each citizen "must know what the law is and act at his peril,"(18) 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."(19)

   2. 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.(20) Certain statutes, including the Internal Revenue Code, expressly criminalize only "willful," "knowing," or "purposeful" conduct.(21) 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.,(22) the Supreme Court held that a shipper could "knowingly" violate a regulation without knowledge of the regulation's existence.(23) The defendant, International Minerals, was charged with shipping sulfuric and hydrofluosilicic acid interstate without proper shipping papers, in violation of Interstate Commerce Commission regulations.(24) International Minerals made no mistake of fact; it knew the shipment contained corrosive materials.(25) 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.(26) A divided Court did not permit ignorance of the regulation to be a defense to its violation.(27) 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."(28) 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.(29) According to the dissent, the majority opinion ignored the statute's use of the word "knowingly."(30)

   3. "WILLFULNESS" IN TAX LAW

      The Internal Revenue Code uses the word "willful" liberally.(31) 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,(32) a taxpayer defended himself on the grounds that he truly believed his wages were not income.(33) 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.(34)

      The trial court convicted the defendant under this instruction, but the Tenth Circuit reversed and remanded for a new trial.(35) 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.(36) 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.(37) 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.(38) The circuits following the subjective standard have carefully distinguished between those taxpayers who misunderstand the law and those who understand but disagree with it.(39) 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.(40)

      Before the Supreme Court decided Cheek, the Seventh Circuit took a different approach(41) by permitting only honest and reasonable mistakes as a defense to a tax evasion charge.(42) The Seventh Circuit applied an objective test to the taxpayer's mistaken "belief." (43) If a reasonable person would realize the groundlessness of the belief, the court may impose criminal sanctions.(44) A defendant's honest but unreasonable belief that he owed no taxes was held to be no defense to tax evasion.(45) If a court found the defendant's belief unreasonable as a matter of law, the sincerity of the belief became irrelevant.(46) In such a case, the court was not obligated to accept evidence demonstrating that the defendant actually held the mistaken belief.(47)

      Under the Seventh Circuit's pre-Cheek approach, courts...