Tax Attorney Alvin Brown Discusses Recent Tax Court Case Discusses Issue of Civil Fraud Penalties Under Section 6651(f) of the IRS Code

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The IRS must prove civil fraud by "clear and convincing evidence."

Tax Attorney Alvin Brown reports on the following discussion and citations are documented in the case of Michael C. Worsham v. Commissioner, TC Memo 2012-219. Date Issued: July 31, 2012, a recent Tax Court case that discusses the 75% civil fraud penalty for not filing a tax return.

The Tax Court in the Worsham case identifies the fact that section 6651(f) imposes an addition to tax of up to 75% in the case of any fraudulent failure to file a tax return. The IRS has the burden of proving fraud by clear and convincing evidence. See sec. 7454(a). To satisfy the burden of proof, the IRS must show: (1) an Receunderpayment of tax exists; and (2) petitioner intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes. Clayton v. Commissioner, 102 T.C. 632, 646 (1994); see also Sadler v. Commissioner, 113 T.C. 99, 102 (1999); Parks v. Commissioner, 94 T.C. 654, 660-661 (1990).

The clear and convincing standard applies not merely to whether an underpayment is attributable to fraud, but also to whether an underpayment exists. Parks v. Commissioner, 94 T.C. at 660-661; Di Rocco v. Commissioner, T.C. Memo. 2009-300 [TC Memo 2009-300].

The Tax Court observed that the Commissioner must prove by clear and convincing evidence that a portion of the underpayment for each taxable year in issue was due to fraud. See Prof'l Servs. v. Commissioner, 79 T.C. 888, 930 (1982). The existence of fraud is a question of fact to be resolved upon consideration of the entire record. King's Court Mobile Home Park, Inc. v. Commissioner 98 T.C. 511, 516 (1992). The , taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213, 223-224 (1971).

Mr. Brown identifies the judicial precedent for proving civil fraud. Because direct proof of a taxpayer's intent is rarely available, fraud may be proved by circumstantial evidence and reasonably inferred from the facts. Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943); Niedringhaus v. Commissioner , 99 T.C. 202, 210 (1992); Rowlee v. Commissioner, 80 T.C. at 1123. Certain indicia, commonly known as badges of fraud, constitute circumstantial evidence which may give rise to a finding of fraudulent intent. Bradford v. Commissioner, 796 F.2d 303, 307 [58 AFTR 2d 86-5532] (9th Cir. 1986), aff'g T.C. Memo. 1984-601 [¶84,601 PH Memo TC]. “Although no single factor is necessarily sufficient to establish fraud, the existence of several indicia is persuasive circumstantial evidence of fraud.” Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989).
Failure to file a tax return is a badge of fraud and “An extended pattern of failing to file income tax returns *** may be persuasive circumstantial evidence of fraud.” DeVries v. Commissioner, T.C. Memo. 2011-185 [TC Memo 2011-185] (citing Marsellus v. Commissioner, 544 F.2d 883, 885 [39 AFTR 2d 77-595] (5th Cir. 1977), aff'g T.C. Memo. 1975-368 [¶75,368 PH Memo TC])); see also Bradford v. Commissioner, 796 F.2d at 307. In addition, when failure to file is viewed in the light of the previous filing of tax returns for prior years, the nonfiling “weighs heavily against” the taxpayer because it demonstrates the taxpayer's awareness of the filing requirement. Castillo v. Commissioner, 84 T.C. 405, 409 (1985).

The Tax Court in Worsham v. Commissioner, stated: "Considering the evidence, we find respondent has proved by clear and convincing evidence that the underpayment for 2006 was due to fraud. As we have previously found, respondent has proved that an underpayment of tax existed for 2006. Petitioner is therefore subject to the section 6651(f) fraudulent failure to file addition to tax for 2006."

Tax attorney Alvin Brown states that it is essential for all taxpayers to file tax returns even if they do not have the funds to pay for the resulting tax debt. A tax debt can be settled after taxes are assessed either in an "Offer in Compromise" or in an Installment Agreement. The filing of the tax return will greatly minimize the opportunity for the IRS to assess a civil fraud penalty. Mr. Brown notes, however, that even a civil fraud penalty can be part of an Offer in Compromise settlement under section 7122 of the IRS Code.

The tax law firm of Alvin Brown & Associates represents clients in civil fraud cases throughout the U.S.. Alvin Brown, tax attorney, believe that all taxpayers under examination should be represented by an experienced tax attorney. Alvin Brown notes that tax attorney involvement increase the opportunity to avoid this very expensive 75% tax penalty. Tax attorney Alvin Brown will give a free consultation for anyone under civil or criminal examination by requesting a consultation at ab(at)irstaxattorney(dot)com

Alvin S. Brown, Esq.
Tax attorney
575 Madison Ave., 8th Floor
New York, N.Y. 10022-8511

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