Recent Tax Court Case outlines the factors in determining whether the Commissioner’s determination of a fraud penalty should be upheld against a taxpayer omitting income
In McClellan v. Comm., T.C. Memo. 2013-251 (Oct. 31, 2013), Tax Court Judge Laro discussed the nine factors for whether to impose the 75% penalty found in I.R.C. Sec. 6663. They are referred to as nonexclusive “badges of fraud” from which the Court may infer a taxpayer's fraudulent intent. They are: (1) understating income, (2) maintaining inadequate records, (3) failing to file tax returns, (4) giving implausible or inconsistent explanations of behavior, (5) concealing assets, (6) failing to cooperate with tax authorities, (7) engaging in illegal activities, (8) attempting to conceal illegal activities, and (9) dealing extensively in cash. Bradford v. Comm., 796 F.2d 303 (9th Cir. 1986). Here, there were six of the nine present: 1, 2, 4, 5, 6 and 9. The court therefore determined that the Commissioner had proven fraud by clear and convincing evidence.
This case highlights how fraud cases are dealt with currently by the Tax Court.