Friday, June 14, 2013

section 6663 fraud penalty

In deciding whether a failure to file is fraudulent under section 6651(f), the same elements that are considered in imposing the addition to tax for fraud under section 6663 and former section 6653(b). Clayton v. Commissioner, 102 T.C. 632, 653 (1994). Those elements are: (1) the existence of an underpayment and (2) fraudulent intent with respect to some portion of the underpayment. See Petzoldt v. Commissioner, 92 T.C. 661, 698-699 (1989).  

Section 6663 Fraud Penalty Fraud is an intentional wrongdoing on the part of a taxpayer with the specific purpose to evade a tax believed to be owed. Sadler v. Commissioner, 113 [*18] T.C. 99, 102 (1999). 



The penalty in the case of fraud is a civil sanction provided primarily as a safeguard for protection of revenue and to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer's fraud. Helvering v. Mitchell, 303 U.S. 391, 401 [20 AFTR 796] (1938); Sadler v. Commissioner, 113 T.C. at 102.

 The Commissioner has the burden of proving by clear and convincing evidence an underpayment for each year in issue and that it is due to fraud. Sec. 7454(a); Rule 142(b). 

The Commissioner must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner, 90 T.C. 1130, 1143 (1988). If the Commissioner establishes that any portion of the underpayment is attributable to fraud, the entire underpayment shall be treated as attributable to fraud and subject to a 75% penalty, unless the taxpayer establishes that some part of the underpayment is not attributable to fraud. Sec. 6663(a) and (b). In the case of a joint Federal income tax return, the section 6663 penalty “shall not apply with respect to the spouse unless some part of the underpayment is due to the fraud of such spouse.” Sec. 6663(c). 

 Fraudulent intent may be inferred from various kinds of circumstantial evidence, or “badges of fraud”, including the consistent understatement of income, inadequate records, implausible or inconsistent explanations of behavior, concealing assets, and failure to cooperate with tax authorities. 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].

In the context of the seventy-five percent penalty of § 6663,  “fraud is intentional wrongdoing on the part of the taxpayer with the specific intent to avoid a tax known to be ow ing.” Bradford v. Comm'r, 796 F.2d 303, 307 [58 AFTR 2d 86-5532] (9th Cir. 1986) (quoting Akland v. Comm'r, 767 F.2d 618, 621 [56 AFTR 2d 85-5649] (9th Cir. 1985)). To estab lish liability for the civil fraud penalty, “the Government must establish: (1) a knowing falsehood; (2) an intent to evade taxes; and (3) an underpayment of tax.” Considine v. United States, 683 F.2d 1285, 1286 [50 AFTR 2d 82-5678] (9th Cir. 1982). [pg. 2013-473]

. Fraudulent intent is a question of fact that must be considered on the basis of an examination of the record and the taxpayer's course of conduct, drawing reasonable inferences therefrom. Spies v. United States, 317 U.S. 492, 499 [30 AFTR 378] (1943); Petzoldt v. Commissioner, 92 T.C. at 699. Because fraudulent intent can seldom be established by direct proof, it may be proved by circumstantial evidence. See Clayton v. Commissioner, 102 T.C. at 647; Petzoldt v. Commissioner, 92 T.C. at 700. Thus, intent to defraud may be inferred from any conduct the likely effect of which would be to conceal, mislead, or otherwise prevent the collection of taxes believed to be owing. Spies, 317 U.S. at 499. Courts look to a nonexclusive list of factors, or “badges of fraud”, to determine whether fraudulent intent exists. Niedringhaus v. Commissioner 99 , T.C. 202, 211 (1992); King's Court Mobile Home Park, Inc. v. Commissioner, 98 T.C. 511, 516 (1992). 

Fraud may be proved by circumstantial evidence and inferences drawn from the facts because direct proof of a taxpayer's [*19] intent is rarely available. Niederinghaus v. Commissioner, 99 T.C. 202, 210 (1992). The taxpayer's entire course of conduct may establish the requisite fraudulent intent. DiLeo v. Commissioner, 96 T.C. at 874; Stone v. Commissioner, 56 T.C. 213, 223-224 (1971).   Fraudulent intent can be inferred from strong circumstantial evidence.” Bradford, 796 F.2d at 307; see 26 U.S.C. § 7454(a) (“In any proceeding involving whether the petitioner has been guilty of fraud with intent to evade tax, the burden of proof in respect to such issue shall be upon the Secretary.”). 

They include: (1) failure to file income tax returns; (2) failure to maintain adequate records; (3) failure to cooperate with tax authorities; (4) assertion of frivolous arguments and objections to the tax laws; (5) lack of credibility in testimony; (6) failure to make estimated tax payments; (7) understatement of income; and (8) concealment of income. See Laurins v. Commissioner, 889 F.2d 910, 913 [65 AFTR 2d 90-364] (9th Cir. 1989), aff'g Norman v. Commissioner, [*14] T.C. Memo. 1987-265 [¶87,265 PH Memo TC]; Bradford v. Commissioner, 796 F.2d 303, 307-308 [58 AFTR 2d 86-5532] (9th Cir. 1986), aff'g T.C. Memo. 1984-601 [¶84,601 PH Memo TC]; Recklitis v. Commissioner, 91 T.C. 874, 910 (1988). No single factor is determinative of fraud; however, the existence of several indicia may constitute persuasive circumstantial evidence of fraud. Niedringhaus v. Commissioner, 99 T.C. at 211; Petzoldt v. Commissioner, 92 T.C. at 700. The taxpayer's background and the context of the events in question may also be considered circumstantial evidence of fraud. Spies, 317 U.S. at 497; Plunkett v. Commissioner, 465 F.2d 299, 303 [30 AFTR 2d 72-5122] (7th Cir. 1972), aff'g T.C. Memo. 1970-274 [¶70,274 PH Memo TC]. We address the badges of fraud individually. 1. Failure To File Income Tax Returns[pg. 146]

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