How Do You Determine Whether You Have Willfully Evaded the Payment of Income Tax?

Two recent Court of Appeals decisions took different approaches in determining whether a debtor’s nonpayment of a tax liability was “willful” for the purpose of Code § 523(a)(1)(C), which renders a tax debt nondischargeable if the debtor “willfully attempted in any manner to evade or defeat such tax.” The Tenth Circuit, in In re Vaughn, — F.3d —-, 2014 WL 4197347 (10th Cir. Aug. 26, 2014) (case no. 13-1189), held that the debtor’s depletion of funds that could have been used to pay a substantial pending tax delinquency demonstrated the mental state element of the provision. In Hawkins v. Franchise Tax Bd. of California, — F.3d —-, 2014 WL 4494845 (9th Cir. Sept. 15, 2014) (case no. 11-16276), however, the Ninth Circuit concluded that a showing of willfulness under § 523(a)(1)(C) requires a showing of specific intent to evade the tax; a mere showing of spending in excess of income is not sufficient to establish the required intent to evade tax.

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