26 USC 7201 Tax Evasion: When Your Lifestyle Becomes the Evidence Against You

Tax evasion looks like a crime about hiding money. But here's what most people don't understand until its to late - the IRS doesn't need to find your offshore accounts or catch you shredding documents. They just measure how you live. If your house is worth $2 million and your cars cost $150,000 combined and you took three European vacations, but your tax return says you made $40,000, your lifestyle IS the evidence. They call it the net worth method. It's how they caught Al Capone in 1931. And in 2024, IRS Criminal Investigation maintained a 90% conviction rate using the exact same mathematics. Your spending patterns don't lie even when you do.

At Spodek Law Group, we represent clients facing federal tax evasion charges under 26 USC 7201. These aren't civil tax disputes. These are felony prosecutions were the government has already spent 6 to 18 months building a case before you even know your being investigated. Our mission is to intervene BEFORE charges are filed, because once the indictment comes, that 90% conviction rate means the question isn't guilty or not guilty - its how much prison time. Todd Spodek and our team understand that tax evasion defense is really about attacking one element: willfulness. Because if the government can't prove you KNEW you were breaking the law, they can't convict. Even if your math was wrong. Even if you owed the money.

The stakes are serious. 26 USC 7201 carries up to 5 years in federal prison and a $100,000 fine for individuals. But the average sentence in 2024 was 27 months, and 59% of convicted tax evaders actually go to prison - this isn't probation territory. More important, though, is what happens before trial. Because IRS-CI doesn't investigate to see if your guilty. They investigate to BUILD cases their certain to win. That 90% conviction rate exists because the Department of Justice Tax Division in Washington DC reviews every single case before approving prosecution. If your charged, they already know they can prove it.

The Math That Sends People to Prison: How the IRS Proves You Earned What You Won't Admit

The net worth method is why tax evasion convictions don't require finding hidden bank accounts. Here's the logic, and its devastating because its simple. The government calculates your net worth at the beginning of a tax year - all your assets minus all your liabilities. Then they calculate your net worth at the END of that year. If your net worth increased by $200,000, but you only reported $50,000 in income, the math says you had $150,000 in unreported income. Unless you can prove the increase came from a non-taxable source like a gift, inheritance, or loan.

Thats the flip. Normally the government has the burden of proof. But with the net worth method, once they show the increase, the burden shifts to YOU to explain were the money came from. And if you can't - or if your explanation doesn't hold up - the jury gets to infer the difference was taxable income you didn't report. The courts have said this is legal since the 1950s. It's how they caught Al Capone. He never showed investigators a single ledger of bootlegging income. But his lifestyle - the custom suits, the cars, the properties - all that was documented by THIRD PARTIES. Mortgage companies. Car dealerships. Tailors. The spending proved the income.

In 2024, the median evaded tax amount in IRS-CI cases was $358,827. Not millions. Not billionaires exclusively. Regular people who thought they were safe because they weren't Tony Soprano. The net worth method doesn't care about the dollar amount. It cares about the PATTERN. If you bought a house, the mortgage company has records. If you bought cars, DMV has registrations. If you paid private school tuition, the school has receipts. Credit card statements. Utility bills. The IRS doesn't need YOUR records. They subpoena everyone ELSE'S records. Your financial life is documented by institutions that have no reason to protect you.

Walter Anderson evaded over $200 million in taxes using offshore accounts and aliases. But when IRS-CI built the case, they didn't rely on finding every hidden account. They used the net worth method. In 1998, Anderson reported income of $67,939 and paid $495 in taxes. Meanwhile, he was living a lifestyle that required millions. The math didn't lie. Anderson eventually owed over $400 million including penalties and interest. It was the largest individual tax evasion case in U.S. history at the time. And it started with simple arithmetic: he spent more than he claimed to earn.

90% Conviction Rate Means They've Already Decided Your Guilty Before Charges Are Filed

IRS Criminal Investigation initiated 2,667 investigations in fiscal year 2024. They obtained 1,571 convictions. Thats not a 90% conviction rate because their investigations are perfect. Its a 90% rate because they DON'T PROSECUTE cases unless their absolutely certain they'll win. Out of 2,667 investigations, only 674 were referred for prosecution. The rest? Referred back to civil division, closed, or resolved without charges.

What this means for you: if your charged, you were hand-selected. IRS-CI special agents spent months - sometimes over a year - gathering evidence. Bank records. Mortgage documents. Interviews with your accountant, your business partners, your ex-spouse. Then the case goes to IRS-CI management for review. If approved, it goes to the DOJ Tax Division in Washington DC. Prosecutors there review it against the backdrop of 10,000 other tax cases. If THEY approve, it comes back to your local U.S. Attorney's office for indictment. This isn't a cop making an arrest decision in 20 minutes. This is a multi-layer vetting process designed to eliminate weak cases.

By the time your charged, the government has already decided your guilty. The trial is just the formality were they prove it. Former IRS Criminal Investigation agents will tell you: the agency's success is measured by conviction rate, not case volume. An agent who brings 10 cases and loses 3 of them has a worse career trajectory than an agent who brings 5 cases and wins all 5. The incentive structure is BUILT for certainty over quantity.

And heres the uncomfortable truth - 59% of convicted tax evaders receive prison sentences. The other 41% get probation, but probation for a federal felony still means: supervised release, restrictions on travel and employment, restitution payments that can destroy you financially, and a conviction that ends professional licenses. If your a doctor, lawyer, CPA, or financial advisor, the conviction is often worse than the prison time because it ends your career. But most people get both. The average sentence in 2024 was 27 months in federal prison. Not the 5-year maximum, but real time. Bureau of Prisons. Away from your family. And thats just the average - some cases result in much longer sentences when conspiracy charges or other counts are stacked.

Jack Fisher and James Sinnott promoted a conservation easement tax scheme that generated $1.3 billion in fraudulent deductions and caused a $450 million tax loss. In January 2024, Fisher was sentenced to 25 years in federal prison. Sinnott got 23 years. Those sentences are far beyond the 5-year statutory maximum for 26 USC 7201 because the government charged them with conspiracy, wire fraud, and multiple counts of tax evasion. Each count carries its own sentence, and the judge can stack them. The result? Sentences that exceed what most people think is possible for "tax crimes."

Your Lifestyle Is a Ledger: Net Worth Method Turns Mortgage Statements Into Evidence

The net worth method isn't some exotic technique used in rare cases. Its one of the primary tools IRS-CI uses when direct evidence of income is unavailable. And "unavailable" doesn't mean the income doesn't exist. It means you didn't DOCUMENT it. Cash businesses. Offshore accounts. Cryptocurrency transactions before exchanges reported everything. Barter transactions. The more you try to hide your income, the more the net worth method becomes the prosecutions best weapon.

How the Net Worth Calculation Works

Heres how it works in practice. Lets say the government is investigating you for tax years 2019 through 2023. They establish your net worth on January 1, 2019. Thats your "opening net worth."

• House worth $300k with $250k mortgage = $50k equity
• Two cars worth $30k total, owned outright = $30k
• Retirement account worth $100k = $100k
• Bank accounts with $20k = $20k
• Total assets: $450k
• Total liabilities: $250k
• Net worth: $200k

Now they calculate your net worth on December 31, 2023:

• House now worth $500k with $200k mortgage = $300k equity
• New car worth $60k financed with $40k loan = $20k equity
• Retirement account now worth $180k = $180k
• Bank accounts with $50k = $50k
• Boat worth $80k, paid cash = $80k
• Total assets: $670k
• Total liabilities: $240k
• Net worth: $430k

Your net worth increased by $230,000 over 5 years. Now the government looks at your tax returns for 2019-2023. You reported total income of $250,000 over that period. But your net worth only increased by $230k? That seems fine, right? Wrong. Because the government ALSO adds your non-deductible living expenses. Rent or mortgage payments. Utilities. Food. Car payments. Insurance. Lets say those total $120,000 over 5 years.

So: $230k net worth increase + $120k living expenses = $350k. But you only reported $250k income. The difference? $100,000 in unreported income. And the IRS will calculate the tax deficiency on that $100k, add penalties and interest, and charge you with attempting to evade approximately $30,000 to $40,000 in taxes depending on your bracket.

You Can't Hide the Evidence

The scary part? You can't hide the evidence. Your mortgage company reported your payments to the IRS (form 1098). Your car loan is registered with the DMV. Your retirement account sends statements to the IRS (form 5498). Your bank reports interest income (form 1099-INT). The boat purchase? If you paid cash, the dealer might have filed a currency transaction report. If you financed it, theres a loan document. If you registered it, the state has records. Every major purchase leaves a trail maintained by someone OTHER than you.

Robert Brockman was charged in 2020 with a $2 billion tax fraud scheme - the largest ever brought against an American citizen. Brockman is the CEO of Reynolds and Reynolds, a software company. Prosecutors allege he hid over 20 years of capital gains income via offshore accounts and secret bank accounts in Bermuda and Nevis. Even with that level of sophistication, the case relied partly on the net worth method. Because you can hide accounts, but you can't hide what you BOUGHT with the money. Properties. Investments. Lifestyle. The spending is the proof.

Willfulness Is Everything - And the Only Thing You Can Fight

26 USC 7201 requires three elements for conviction. First, the existence of a tax deficiency - meaning you actually owed taxes you didn't pay. Second, an affirmative act constituting evasion or attempted evasion. Third, willfulness. The first two are usually easy for the government to prove. If the net worth method shows unreported income, theres a deficiency. If you filed a tax return that didn't include that income, thats the affirmative act. Willfulness is were the fight happens.

Willfulness means "the voluntary, intentional violation of a known legal duty." The government must prove beyond reasonable doubt that you KNEW you had a duty to report the income and pay the tax, and you intentionally chose not to. This is different from negligence. Different from a mistake. Different from relying on bad advice if you genuinely believed the advice was correct. The Supreme Court case Cheek v. United States held that a good faith belief that you weren't violating the law - even if that belief was objectively unreasonable - defeats willfulness.

Let that sink in. You can be WRONG about the law. You can take a position that every tax professional in the country would say is incorrect. But if you GENUINELY BELIEVED it was legal, there's no willfulness. The challenge, of course, is proving you genuinely believed it. After your indicted. When the jury is looking at evidence that you hid income, lied to your accountant, used offshore accounts, or structured cash deposits to avoid reporting requirements. Good faith is a powerful defense in theory. In practice, once the case gets to trial, convincing a jury you acted in good faith is almost impossible.

Establishing Good Faith BEFORE Charges

Thats why willfulness is the battleground BEFORE charges are filed. If your under investigation - or if you think you might be - the time to establish good faith is NOW. Did you rely on a CPA or tax attorney? Get documentation of what you told them and what they advised. Did you misunderstand the law? Show that you researched it, asked questions, tried to comply. Did you make a mistake in calculating income? Show that it was arithmetic error, not intentional concealment. None of this works if the evidence shows you KNEW you were wrong and did it anyway. But if theres genuine ambiguity, good faith can prevent charges.

The flip side? If you lied to your accountant, you've destroyed the good faith defense. If you went "professional shopping" - asking multiple accountants until one told you what you wanted to hear - that proves willfulness. If you structured cash deposits just under $10,000 to avoid currency transaction reports, thats evidence of willfulness (and a separate crime under 31 USC 5324). If you used nominees, shell companies, or offshore accounts without telling your tax preparer, thats willfulness. The government will prove it through your ACTIONS, because actions speak louder than whatever you claim you believed.

The Voluntary Disclosure Trap: It Only Works Before They Find You (And You Don't Know When That Is)

The IRS has a Voluntary Disclosure Practice that can protect you from criminal prosecution. Heres the deal: if you come forward BEFORE the IRS starts investigating you, disclose everything, pay the taxes and penalties, and cooperate fully, the IRS will generally not refer your case for criminal prosecution. Its a way to resolve non-compliance and limit exposure to prison time. But theres a trap. You have to disclose BEFORE the investigation starts. And you don't know when that is.

The investigation doesn't start when IRS-CI knocks on your door. It starts when a special agent opens a case file. That could be months or even years before you hear from them. It could start because your bank filed a suspicious activity report. Or because a business partner is cooperating in their own case and mentioned you. Or because a former spouse or employee sent an anonymous tip. Or because the civil division found something during an audit and referred it to criminal. You won't know. The first contact you get might be a knock on the door with a search warrant. At that point, voluntary disclosure is off the table.

The Offshore Voluntary Disclosure Program (OVDP) closed in 2018. It was a specific program for people with undisclosed foreign accounts. Tens of thousands of people used it to come into compliance and avoid prosecution. Now, the only option is the general Voluntary Disclosure Practice (VDP), which is available but requires that you meet specific criteria. You must be WILLFUL in your noncompliance - meaning you knew you had the obligation and intentionally didn't comply. If your violation was non-willful, you use the Streamlined Filing Compliance Procedures instead, which don't offer criminal protection because you don't need it (non-willful violations aren't criminal).

Statute of Limitations Complications

The timeline matters. 26 USC 7201 has a 6-year statute of limitations. But the clock doesn't start when you evaded the tax. It starts from the later of the filing date OR the due date of the return. If the return was due April 15, 2020, but you didn't file it until April 15, 2023, the statute doesn't even START running until 2023. The government has until April 2029 to charge you. And if you filed a fraudulent return, there's an argument they can use the civil fraud statute of limitations, which is unlimited. The point? Waiting for the statute to expire is a gamble. And if your wrong, voluntary disclosure won't be available because the investigation will have already started.

What Happens When You're Actually Charged: 27 Months Average, But Some Get Decades

Once your indicted, the math changes. 90% conviction rate means going to trial is statistically suicide. The government doesn't bring the case unless their certain they can prove it. The evidence has been vetted by multiple layers of IRS-CI and DOJ reviewers. Your defense at trial is limited to attacking willfulness, because the tax deficiency and affirmative act are usually proven by documents. Bank records. Tax returns. Mortgage statements. Those don't lie.

The average sentence for tax fraud offenders in 2024 was 27 months in federal prison. Thats below the statutory maximum of 5 years, but its real time. Federal sentences don't have parole. You serve at least 85% of the sentence. 27 months means roughly 23 months actually incarcerated. Two years in a federal facility. Away from your family, your business, your life. And when you get out, your a convicted felon. Professional licenses? Gone for doctors, lawyers, CPAs, financial advisors. Security clearances? Revoked. Employment? Good luck explaining a federal tax evasion conviction in job interviews.

When Sentences Exceed the Average

But the average doesn't tell the whole story. Some cases result in probation. Some result in sentences well above the average. The sentencing guidelines consider the tax loss amount, the duration of the scheme, whether you obstructed the investigation, and whether you accepted responsibility. A $50,000 tax loss with cooperation and a guilty plea might result in probation. A $5 million tax loss with obstruction and lies to investigators might result in 5+ years. And if the government charges you with additional crimes - conspiracy, wire fraud, money laundering - the sentences stack.

Jack Fisher and James Sinnott ran a conservation easement scheme. They sold over $1.3 billion in fraudulent tax deductions, causing a $450 million tax loss to the IRS. Fisher got 25 years. Sinnott got 23 years. Those sentences were based on multiple counts of conspiracy, tax evasion, and wire fraud. The judge didn't just sentence them for one count of 26 USC 7201. Each fraudulent tax return was a separate count. Each year was a separate conspiracy. The result? Sentences that functionally mean they'll die in prison.

Cooperation and Restitution

Cooperation can reduce sentences. Walter Anderson, despite evading $200 million, received a sentence below the guidelines because he cooperated with investigators and provided information about others involved in his schemes. Cooperation means: admitting guilt, sitting for debriefings, testifying against co-conspirators if needed, and helping the government recover assets. Its not a get-out-of-jail-free card. But it can be the difference between 5 years and 2 years. Or between 10 years and 5 years.

Restitution is mandatory. You'll be ordered to pay back the evaded taxes, plus penalties and interest. The IRS will also pursue civil penalties - 75% fraud penalty on top of the taxes owed. If you evaded $100,000 in taxes, you'll owe the $100k, plus the fraud penalty of $75k, plus interest that compounds. A $100k tax evasion can easily become a $300k debt. And unlike other debts, tax debt is almost never dischargeable in bankruptcy. It follows you for life.

Collateral Consequences

The collateral consequences are were most people underestimate the damage. Federal conviction means:

• No voting rights in many states until sentence completion
• No firearms ownership
• No federal contracts or grants
• No public housing assistance
• Professional license revocation (doctors, lawyers, CPAs)
• State licensing board hearings
• Business restrictions and government contract bars

A doctor convicted of tax evasion loses their medical license. A lawyer gets disbarred. A CPA loses their certification. The conviction doesn't just send you to prison - it ends the career you built.

Call Spodek Law Group Before IRS-CI Calls You: 212-300-5196

If your under investigation for tax evasion, or if you think you might be, the time to act is NOW. Not after charges are filed. Not after the knock on the door. Now. Because once IRS-CI opens a case, everything you say can be used against you. Everything you do is scrutinized. And if you wait until your charged, that 90% conviction rate means your fighting a battle the government has already won.

Spodek Law Group represents clients in federal tax evasion cases nationwide. We understand that tax evasion defense is different from other federal crimes. The evidence is documents. The proof is mathematics. The fight is willfulness. Our approach is to intervene BEFORE charges are filed, work with the IRS and DOJ to show good faith or lack of willfulness, and if charges are inevitable, negotiate the best possible resolution to minimize prison time and financial penalties.

Todd Spodek has handled complex federal cases were the government spent years building their case. We know how IRS-CI operates. We know what DOJ Tax Division looks for when reviewing cases for prosecution. We know were the weaknesses are in net worth method cases - challenging the opening net worth calculation, proving non-taxable sources for increases, showing good faith reliance on professional advice. And we know that in federal court, the BEST outcome is often the one were charges are never filed.

When to Call

If you've received a target letter from the U.S. Attorney's office. If IRS-CI special agents have contacted you. If your accountant or business partner has been subpoenaed. If you know you have unreported income and your considering voluntary disclosure. Call us. 212-300-5196. The consultation is confidential. We'll review your situation, explain your options, and tell you honestly what the risks are. Because the worst decision you can make is waiting until the government has already decided to prosecute.

Tax evasion cases are won or lost before trial. They're won by attacking willfulness. By showing good faith. By negotiating with investigators before the case gets to DOJ. By using voluntary disclosure when its still available. By building a defense based on the actual evidence, not hope. That 90% conviction rate isn't an accident. Its the result of a system designed to prosecute only the cases the government is certain to win. The question isn't whether the government CAN prove their case. The question is whether you can show them they SHOULDN'T bring it. And that requires a defense attorney who understands federal tax litigation, IRS-CI investigations, and how to convince prosecutors that willfulness can't be proven.

We've seen clients facing 5 years in federal prison walk away with no charges because we intervened early and showed the IRS that the case wasn't as strong as it looked. We've seen clients who waited too long and had no choice but to plead guilty and hope for a below-guidelines sentence. The difference? Timing. The earlier we get involved, the more options you have. Once your indicted, your options collapse to: plead guilty and cooperate, or go to trial and face a 90% chance of conviction.

Your lifestyle might already be the evidence. The net worth method doesn't require finding hidden accounts. It just requires proving you spent more than you reported. And if that gap exists, the government can build a case using records you don't even control. Mortgage statements. Car registrations. Credit card bills. Bank deposits. Every financial institution you've ever worked with is a potential source of evidence. And IRS-CI has the subpoena power to get all of it.

Don't wait for the knock on the door. Don't wait for the target letter. If you know theres a problem, deal with it now. Call Spodek Law Group: 212-300-5196. We'll tell you what your facing, what your options are, and how to protect yourself before the government decides your guilty. Because once they decide, that 90% conviction rate means the fight is already over.