Tax Court Case of the Week: Failure to Respond to IRS Allegation Deemed Admission to Liability

The United States Tax Court recently affirmed that Yvonne K. Young, an income tax preparer, is liable for a 75% civil fraud penalty.  Young failed to respond to IRS affirmative allegations that she had underreported her income and grossly overstated withholdings over the course of three years.  She did not have legal representation.

The Facts

On April 3, 2013, the IRS sent Yvonne K. Young, an income tax preparer with 20 years’ experience, a notice of deficiency for the tax years 2008, 2009 and 2010.  The IRS had determined that Young had grossly overstated the amount of income tax that had been withheld during those years, resulting in underpayments of $62,957, $86,917 and $24,584 for the years at issue. The IRS also determined that Young had transmitted more than 100 false 1099-OID and 1099-A forms. 

In addition to claiming the deficiencies, the IRS imposed Section 6663 fraud penalties (75% of the underpayment attributed to fraud) — $47,218 for 2008, $65,188 for 2009 and $18,438 for 2010.  Young filed a timely petition with the United States Tax Court on July 8, 2013, requesting a redetermination of the tax deficiencies and fraud penalties.  The IRS filed its answer on September 13, 2013, citing 79 affirmative allegations supporting its determination of deficiencies and imposition of fraud penalties. Young did not file a reply. 

On November 13, 2013, the IRS moved for an order that Young’s undenied allegations be deemed admissions pursuant to Rule 37(c). Young was ordered by the Court to file a reply by December 11, 2013. She asked for and was granted an extension, but still never filed her reply. 

On February 24, 2014, the Court granted the Rule 37(c) motion. On June 27, 2014, the IRS filed a motion for summary judgment asserting that the case be decided in its favor since “no genuine issues of material fact” were in dispute. The Court ordered Young to file a response to the motion by July 21, 2014. Young again did not file a reply. 

Tax Court Findings

The Tax Court was charged with deciding whether summary judgment should be granted as to the tax deficiencies and the Section 6663 fraud penalties:

  1. The Income Tax Deficiencies. Since Young failed to respond to the IRS’ affirmative allegations, she was deemed to have admitted the facts presented by the IRS as to the income tax deficiencies for the years in issue. The Tax Court granted summary judgment per Rule 121(a), stating that deemed admissions pursuant to Rule 37(c) have long been held sufficient to sustain a motion for summary judgment.
  2. Section 6663 Fraud Penalties. The Court found that the case exhibited numerous signs of fraud, including: underreporting income, grossly overstating withholdings, filing false income tax returns and other false documents, engaging in illegal activities, and the presentation of implausible or inconsistent explanations. In addition to extensive evidence presented by the IRS, Young’s 20 years as an income tax preparer and bookkeeper was raised as further evidence of fraudulent intent.

Tax Problems? Hire a Tax Attorney

As Abraham Lincoln famously said: “He who represents himself has a fool for a client.” Probably one of Young’s biggest mistakes was not retaining an attorney to represent her – even the most experienced tax preparers do not have the knowhow and expertise to handle most tax controversies. If you are in trouble with the IRS, hire an experienced and aggressive tax attorney to vigorously defend you (and to comply with all deadlines). To learn more, call the San Francisco tax law firm of Moskowitz, LLP.   

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