Absence of a Deficiency
Arguing the absence of a tax deficiency is a common tax evasion defense strategy. Similar in theory as the cash hoard defense, this argument is aimed at disproving the “existence of a tax deficiency.” Simply put, the defendant is asserting that he has already paid all due taxes and that any alleged deficiency is actually not taxable.
A common example is offsetting errors, where the defendant has mistakenly understated one area of income but inadvertently compensated for it in another. Also, the funds might simply not be a taxable form of income at all. For instance, many gifts are not taxable, and the same goes for loans and returns of capital.
While an IRS assessment is sufficient to prove a deficiency, all defendants have a constitutional right to challenge all parts of the prosecution’s case, including the assessment. So while a jury may be instructed to give some weight to an IRS assessment, all defendants on tax fraud prosecutions are entitled to have the jury evaluate the validity of the assessment.