Readers interested in the risks of being audited with respect to income tax noncompliance arising from foreign assets (particularly financial accounts) often ask what it takes for the IRS to prove fraud. I am aware of no standard litmus test of civil tax fraud that will identify, particularly for laymen, when a court might find civil fraud. However, decided cases can help set parameters from which, with enough cases, one might be able to make an educated guess as to when a court might find civil tax fraud.
We have one such case from the Tax Court. Quinn v. Commissioner, T.C. Memo. 2012-178.
Ms. Quinn was an IRS tax compliance officer. She claimed what appear to be such large charitable contributions ($48,000+ for 2 years) and medical deductions ($47,000+ for 2 years), that the IRS scoring techniques probably flagged her for audit. She also claimed certain dependents that she was not entitled to claim.
"While we cannot be certain of the source, we find that some (if not most) of petitioner's records for each year at issue were altered. Unexplained inaccuracies in other documents imply that petitioner fabricated receipts for both years at issue. Even documents that appeared genuine did not substantiate that the couple actually incurred those costs or expenses.
Her testimony and assertions in the post-trial brief were also inconsistent and implausible. Petitioner maintained she was unaware of the requirements for accurately stating and substantiating income. We find this incredible. In contrast, the credible testimony of her supervisor, her husband and representatives of the charitable organizations contradicted petitioner's records, testimony and assertions."
She lost the deductions and the court imposed the civil fraud penalty.
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