When Someone is Charged with Tax Evasion, Can the Jury Consider the Defendant’s Previous Noncompliance with the IRS?

The answer is yes. Defendant’s prior non-compliance with federal tax laws can be used to prove the defendant’s intent to commit the crime charged.

This was addressed in a case heard in the United States Court of Appeals for the Third Circuit. US v. Daraio, 445 F. 3d 253 (C.A. 3 (N.J.), 2006). In that case, the grand jury returned an indictment charging Daraio, the Defendant, with one count of tax evasion for violating 26 U.S.C. §7201 and 18 U.S.C. §2. Specifically, the indictment charged Daraio with the following:

knowingly and willfully attempt[ing] to evade and defeat the payment of a substantial part of the payroll taxes due and owing by Eagle Security, Inc. to the United States for the quarterly period that included April 1994 through April 1998, in the amount of approximately $222,607.40, by directing clients of Eagle Security, Inc. to pay their unpaid balances that they owed to Eagle Security, Inc. to E.S.S. Co. Id.

The indictment charged that Daraio directed the clients of Eagle Security, Inc. to pay their unpaid balances to E.S.S. Co. around the same time IRS issued levies on ten clients of Eagle Security, Inc. Those levies required them to pay the IRS the balances that would otherwise be owing to Eagle Security. Id. The government introduced this evidence to prove Daraio’s willingness or intent based on her ‘general feelings or general attitude towards the IRS’. Id. The evidence included the following items:

(1) Payroll tax records for Joseph Daraio, Daraio’s husband, trading as ESS–Co. and Quest Investigators, pertaining to tax periods from 1989–1993 including the records themselves, as well as, for certain tax periods, certifications of a “lack of records” indicating the failure to file tax returns;

(2) Certifications by the IRS that Eagle Security did not file payroll tax returns in 1990–1993 and 1999–2004;

(3) Payroll tax records, again including certifications of lack of records, for ESS–Co., beginning in the third quarter of 1998 through the first quarter of 2004;

(4) Certifications of lack of records for ESS–Co. from 1992–1998 and 2000–2004;

(5) Corporate tax records for Eagle Security from 1990–2003,that showed that it had not filed forms with the IRS in 1999, 2001, and 2002;

(6) Corporate tax records for ESS–Co. from 1998–2003; and

(7) Joint personal income tax returns for Joseph Daraio and Daraio from 1984 and 1989–2003.

Id. at 256.

Before presenting this evidence at trial, the prosecutor filed and served a notice of its intent to introduce the evidence at trial. At trial, the lower court gave the following limiting instructions to the jury:

Ladies and gentlemen of the jury, you will soon, and at various other times during the trial, hear evidence of acts the defendant—of acts of the defendant that may be similar to those charged in the indictment, but which were committed on other occasions.

 You must not consider any of this evidence in deciding if the defendant committed the acts charged in this indictment. However, you may consider this evidence for other very limited purposes.

 If you find beyond a reasonable doubt from other evidence in this case, that the defendant did commit the acts charged in the indictment, then you may consider the evidence of similar acts allegedly committed on other occasions, to determine, one, whether the defendant had the intent necessary to commit the crime charged in the indictment; two, whether the defendant had the motive to commit the act charged in the indictment; or, three, whether the defendant willfully committed the acts for which she is on trial, or rather committed them by accident, negligence, or mistake.

Id. at 257.

After the jury returned a guilty verdict, Daraio appealed. The Court of Appeals rejected Daraio’s arguments and affirmed her conviction. In determining the admissibility of the evidence at issue, the Court applied the following four-part test:

(1) The evidence must have a proper purpose; Id. at 264.

(2) It must be relevant; Id.

(3) Its probative value must outweigh its potential for unfair prejudice; and Id.

(4) The court must charge the jury to consider the evidence only for the limited purposes for which it is admitted. Id.

The Court held that the evidence of Daraio’s “history of non-compliance with the IRS” was relevant to prove willfulness and the lower court’s limiting instructions were adequate to prevent any unfair prejudice. Id. at 265. The Court also relied on precedent which held that ‘a defendant’s past taxpaying record is admissible to prove willfulness circumstantially because such evidence is indicative of intent to evade the tax system.’ Id.

Thus, the Court allowed the admission of evidence of defendant’s prior taxpaying records to prove the defendant’s intent to evade taxes.

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