Fraud Penalties

Question 1

What are civil fraud penalties?

What is the definition of fraud?

What does not constitute fraud?

Answer 1

IRC 6663(a): If any portion of an “underpayment of tax required to be shown on a return is due to fraud, add 75% of the portion of the underpayment which is attributable to fraud to the tax.

• You can have items that are not fraudulent; the 75% are only on fraudulent items.

Fraud Definition:

• An intentional violation of a known legal duty
• Irresponsible or negligent conduct does not constitute fraud

Question 2

How do you prove fraud?

Answer 2

• Direct evidence is rare
• IRS usually establishes fraudulent intent through circumstantial evidence
• There are various indicia of fraud, known as “badges of fraud,” or Spies acts, from Spies v. US, where Supreme Court announced the requirement that the gov prove that there were affirmative acts of evasion in a tax evasion prosecution.
• Facts and circumstances holistic test

Question 3

What are the common badges of fraud?

Answer 3

1. Understating income;
2. Maintaining inadequate records;
3. Giving implausible or inconsistent explanations of behavior;
4. Concealing income or assets; conceal is the biggest indicia; efforts to hide something
5. Failing to cooperate with tax authorities;
6. Engaging in illegal activities;
7. Providing incomplete or misleading information to one’s tax preparer;
8. Giving testimony that lacks credibility;
9. Filing false documents, including filing false income tax returns;
10. Failing to file tax returns; and
11. Dealing in cash big indicator

Question 4

What is failure to maintain adequate records under IRM 25.1.2.3?

Answer 4

• Multiple sets of books or no records.
• Failure to keep adequate record s, concealment of records, or refusal to make records available.
• False entries, or alterations made on the books and records; back-dated or post-dated documents; false invoices, false applications, false statements, or other false documents or applications.
• Invoices are irregularly numbered, unnumbered or altered.
• Checks made payable to third parties that are endorsed back to the taxpayer. Checks made payable to vendors and other business payees that are cashed by the taxpayer.
• Variances between treatment of questionable items as reflected on the tax return, and representations within the books.
• Intentional under- or over-footing of columns in journal or ledger.
• Amounts on tax return not in agreement with amounts in books.
• Amounts posted to ledger accounts not in agreement with source books or records.
• Journalizing questionable items out of correct account.
• Recording income items in suspense or asset accounts.
• False receipts to donors by exempt organizations.

Question 5

What are some badges of Fraud while interacting with IRS - IRM 25.1.2.3(6)?

Answer 5

• Proof that the ta return was incorrect to such an extent and in respect to items of such magnitude and character as to compel the conclusion that the falsity was known and deliberate.
• Payment of improper expenses by or for officials or trustees.
• Willful and intentional failure to execute pension plan amendments.
• Backdated applications and related documents.
• False statements on Tax Exempt/Government Entity (TE/GE) determination letter applications.
• Use of false social security numbers.
• Submission of false Form W-4.
• Submission of a false affidavit.
• Attempt to bribe the examiner.
• Submission of tax returns with false claims of withholding (Form 1099-OID, Form W-2) or refundable credits (Form 4136, Form 2439) resulting in a substantial refunds
• Intentional submission of a bad check resulting in erroneous refunds and releases of liens.
• Submission of false Form W-7 information to secure Individual Taxpayer Identification Number (ITIN) for self and dependents.

Question 6

Is civil fraud penalty joint?

Answer 6

• IRC 6663(c): Special rule for joint returns: “In the case of a joint return, this section shall not apply with respect to a spouse unless some part of the underpayment is due to the fraud of such spouse.”
• Married people with joint returns = both people have joint and several liability of fall items on return and can be subject to tax and IRS can collect tax from both
• Can go after lower income earning spouse for full tax unless they have innocent spouse defense
• To show joint liability: must show that fraud committed by spouse

Question 7

1. What are FRIVOLOUS return penalties under IRC 6702?
2. What is the opportunity to withdraw rule?
3. How do you know what is frivolous?
4. Can the penalty be reduced?

Answer 7

1. A person shall pay a penalty of $5,000 if:
   (1) such person files what purports to be a return of a tax imposed by this title but which
   (A) DOES NOT CONTAIN INFORMATION on which the substantial correctness of the self-assessment may be judged, or
   (B) CONTAINS INFORMATION that on its face indicates that the self-assessment is SUBSTANTIALLY INCORRECT, and

(2) the conduct is:
(A) is based on a position which the Secretary has identified as FRIVOLOUS, OR
(B) reflects a DESIRE to DELAY or IMPEDE the administration of Federal tax laws.

2. Opportunity to withdraw submission if the Secretary provides a person with NOTICE that a submission is a specified frivolous submission and such person withdraws such submission within 30 days after such notice, the penalty won’t be imposed.
3. IRS shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous
4. IRS may reduce the amount of any penalty imposed under this section if the Secretary determines that such reduction would promote compliance with and administration of the Federal tax laws.

Question 8

1. What are erroneous refund penalties under IRC 6676?
2. What does excessive amount means?
3. Is there a reasonable cause exception for a “non-economic substance transaction”?

Answer 8

1. If a claim for refund or credit with respect to income tax is made for an excessive amount, the person making such claim shall be liable for a penalty in an amount equal to 20% of the excessive amount, unless there is reasonable cause.
2. “Excessive amount” means the amount by which the amount of the claim for refund or credit exceeds the amount of such claim allowable under this title.
3. No, there is no reasonable cause exception for a “non-economic substance transaction”