Civil Tax Fraud – False Statements

Defend Against Audit Escalation

When a tax return is found to have an underpayment that is attributable to fraud, IRC §6663 sets forth that the penalty is 75% of the additional tax owed. Civil tax fraud is generally considered an intentional wrongdoing by a taxpayer with the specific purpose of evading tax and can also lead to the additional charge of criminal tax fraud. Mere negligence is not in itself sufficient to establish fraud, but this is a highly subjective standard. So, what you may see as a simple honest mistake, the IRS may view as criminal and civil tax fraud. Additionally, filing an amended return does not preclude the assessment of this penalty.

Case Examples:

In order to assess the civil tax penalty, the IRS must prove that some part of the tax underpayment resulted from the taxpayer’s intentional wrongdoing, deceit, and intent to evade tax. Obtaining a false statement is very useful to the government when assessing this penalty.

  1. False statement to an auditor regarding a real estate investment: In this case, the taxpayer went through a tax audit and was assessed a tax deficiency. Included in the assessment was a 75% penalty for civil tax fraud. Because the taxpayer believed that he had fully cooperated during the tax audit, he felt he should not be liable for the penalty and elected to dispute it by filing a tax court petition.

    Judge’s analysis as follows (note: Moskowitz LLP has redacted and edited the opinion for brevity and identification of the party issues):
    When the existence of the holding account was finally uncovered and (Ms. X, IRS auditor) was seeking additional information on [taxpayer’s business’] purported loans to [taxpayer], [taxpayer] told her that [taxpayer’s business] was paying his personal mortgage because the corporation was investing in real estate. We believe [taxpayer’s] statement was simply intended to deceive [Ms. X, IRS auditor] and delay the investigation. In addition to making the false statement … We believe that [taxpayer’s] actions when dealing with [Ms. X, IRS agent] were intended to conceal information which eventually led her to discover understatements of income for both [taxpayer and taxpayer’s business]. We find the concealment of such information from [Ms. X, IRS Agent] and the false statements made in connection with that concealment to be badges of fraud.
    The civil fraud penalty was upheld.

  2. Attorney who made false statements: Fraud was indicated in a different manner in this case. First, the petitioner was aware of his obligation to file returns and that taxes were due for each of the years 1963 through 1969. He was an attorney, a well-educated person and had filed Federal income tax returns in previous years. During the years in question, he prepared income tax returns for some of his clients, communicated with the Internal Revenue Service on behalf of his clients, and earned a substantial income which required him to file returns. Second, the petitioner attempted to avoid payment of his tax liabilities for 1963 through 1969 by making false and inconsistent statements to respondent's agents during the course of their examinations. (emphasis added)
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