Source: https://procedurallytaxing.com/category/fraud/page/2/
Timestamp: 2019-04-22 16:57:09+00:00

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Here is a summary of some of the other tax procedure items we didn’t otherwise cover in November. This is heavy on tax procedure intersecting with doctors (including one using his RV to assist his practice). Also, important updates on the AICPA case, US v. Rozbruch, and the DOJ focusing on employment withholding issues.
I’ve got a bunch of Jack Townsend love to start SumOp. He covered a bunch of great tax procedure items last month. No reason for me to do an inferior write up, when I can just link him. First is his coverage of the Dr. Bradner conviction for wire fraud and tax evasion found on Jack’s Federal Tax Crime’s blog. Why is this case interesting? Because it seems like this Doc turned his divorce into some serious tax crimes, hiding millions offshore. He then tried to bring the money back to the US, but someone in the offshore jurisdiction had flipped on him, and Homeland Security seized the funds ($4.6MM – I should have become a plastic surgeon!). His ex is probably ecstatic that the Feds were able to track down some marital assets. I am sure that will help keep her in the standard of living she has become accustom to.
I know I’ve said this before, but you should really follow Jack Townsend’s blogs. From his Federal Tax Procedure Blog, a write up of the Second Circuit affirming the district court in United States v. Rozbruch. Frank Agostino previously wrote up the district court case for us with his associates Brian Burton and Lawrence Sannicandro. That post, entitled, Procedural Challenges to Penalties: Section 6751(b)(1)’s Signed Supervisory Approval Requirement can be found here. Those gents are pretty knowledgeable about this topic, as they are the lawyers for the taxpayer. As Jack explains, the Second Circuit introduces a new phrase, “functional satisfaction” (sort of like substantial compliance) as a way to find for the IRS in a case considering the application of Section 6751(b) to the trust fund recovery penalty.
One last blog post, but this one is from Taxlitigator –Tax Controversy (Civil & Criminal) Report and is a write up about the DOJ putting more time and resources to employment withholding issues.
The Tax Court in Trumbly v. Comm’r has held that sanctions could not be imposed against the Service under Section 6673(a)(2) where the settlement officer incorrectly declared the administrative record consisted of 88 exhibits that were supposed to be attached to the declaration but were not actually attached. The Chief Counsel lawyer failed to realize the issue, and forwarded other documents, claiming it was the record. The Court held that the Chief Counsel lawyer failed to review the documents closely, and did not intentionally forward incorrect documents. The Court did not believe the actions raised to the level of bad faith (majority position), recklessness or another lesser degree of culpability (minority position). Not a bad result from failing to review your file!
This isn’t that procedure related, but I found the case interesting, and I’ve renamed the Tax Court case Cartwright v. Comm’r as “Breaking Bones”. Dr. Cartwright, a surgeon, used a mobile home as his “mobile office” parked in the hospital parking lot. He didn’t treat people in his mobile home (which is good, because that could seem somewhat creepy), but he did paperwork and research while in the RV. Cartwright attempted to deduct expenses related to the RV, including depreciation. The Court found that the deductions were allowable, but only up to the percentages calculated by the Service for business use verse personal use. I’m definitely buying an Airstream and taking Procedurally Taxing on the road (after we find a way to monetize this).
The IRS thinks you should pick your tax return preparer carefully (because it and Congress have created a monstrosity of Code and Regs, and it is pretty easy for preparers to steal from you).
The issue on appeal revolves whether the AICPA has standing to challenge the plan in court rather than the merits of the suit. The panel and AICPA’s focus was on so-called competitive standing, which essentially gives a hook for litigants to challenge an action in court if the litigant can show an imminent or actual increase in competition as a result of the regulation.
On October 30th, the Court of Appeals for the District of Columbia reversed the lower court, and held that the AICPA had standing to challenge the IRS’s Annual Filing Season Program, where the IRS created a voluntary program to somewhat regulate unenrolled return preparers. The Court found the AICPA had “competitive standing”, which Les highlighted in his post as the argument the Court seemed to latch on to. For more info on this topic, those of you with Tax Notes subscriptions can look to the November 2nd article, “AICPA Has Standing to Challenge IRS Return Preparer Program”. Les was quoted in the post, discussing the underlying reasons for the challenge.
Service issued CCA 201545017 which deals with a fairly technical timely (e)mailing is timely (e)filing issue with an amended return for a corporation that was rejected from electronic filing and the corporation subsequently paper filed. The corporation was required to efile the amended return pursuant to Treas. Reg. 301.6011-5(d)(4). Notice 2010-13 outlines the procedure for what should occur if a return is rejected for efiling to ensure timely mailing/timely filing, and requires contacting the Service, obtaining assistance, and then eventually obtaining a waiver from efiling. There is a ten day window for this to occur. The corporation may have skipped some of the required steps and just paper filed. The Service found this was timely filing, and skipping the steps in the notice was not fatal. The Service did note, however, that efiling for the year in question was no longer available, so the intermediate steps were futile. A paper return would have been required. It isn’t clear if the Service would have come to the same conclusion if efiling was possible.
Sticking with CCAs, in November the IRS also released CCA 201545016 dealing with when the IRS could reassess abated assessment on a valid return where the taxpayer later pled guilty to filing false claims. The CCA is long, and has a fairly in depth tax pattern discussed, covering whether various returns were valid (some were not because the jurat was crossed out), and whether income was excessive when potentially overstated, and therefore abatable. For the valid returns, where income was overstated, the Service could abate under Section 6404, but the CCA warned that the Service could not reassess unless the limitations period was still open, so abatement should be carefully considered.
Before getting to the tax procedure, we wanted to let everyone know the application for the ABA Tax Section fellowships is now open. Here is a link to the release regarding the applications and the Christine A. Brunswick Public Service Fellowships. Here is another link regarding the process, which also highlights recent winners. I’ve had the pleasure of meeting many of the recipients, and it is an esteemed group providing amazing services thanks to the ABA Tax Section.
A few quick follow ups to some items from last week. We had a wonderful post from Robin Greenhouse on the BASR Partnership case dealing with the statute of limitations and fraud of the tax preparer, which can be found here. Ms. Greenhouse and Les were both also quoted in a story on the topic for Law360, which can be found here (may be behind a subscription wall, sorry). Keith posted on the Ryscamp case, which dealt with jurisdiction to review a determination that a taxpayer’s position is frivolous. Keith was also quoted about the case in the Tax Notes article, which can be found here (also behind subscription wall, sorry again).
We flagged earlier in the month that Congress has overturned Home Concrete with the new Highway Bill. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 has a few other changes to tax procedure laws. Probably the biggest news is that partnerships and s-corps will need to file tax returns three months and fifteen days after the close of their tax years (for calendar filers, that will be March 15). This is a change for partnerships, but not s-corps. C-corporations, however, will not have to file until four months and fifteen days after the close of the tax year (April 15 for calendar year filers). The goal of this is to get k-1s to individuals prior to the April 15 filing deadline. I assume c-corps were pushed back a month on work flow concerns for preparers. The act also revised the extended due dates for various types of returns. In addition, next year, FBARs will be due April 15, and there will be a possible six month extension.
The District Court for the District of New Jersey decided a lien priority case where a bank recorded a mortgage regarding a home equity line of credit (HELOC), some portion of which may have been withdrawn after a federal tax lien was filed. In US v. Balice, the bank argued that the withdrawal date of the funds on the HELOC was irrelevant and state law directed that the date related back to the original recording date (the Court declined to offer an opinion about whether or not this is the actual NJ law). The government argued that federal law applied, which held first in time is first in right, but only to the extent the funds were already withdrawn. The Court held that state law defined the property rights, but federal law governed the lien priority. Under federal the federal statute, the security interest was only perfected when the funds were actually borrowed. See Section 6323(a).
The IRS has issued two important Revenue Rulings in the international arena. The first outlines the procedures for making competent authority requests. The second is for taxpayers seeking advanced pricing agreements, and can be found here.
Jack Townsend on his Federal Tax Procedure blog has a discussion of Sissel v. US Dept. HHS, where the majority, concurring and dissenting opinions all review the Originations Clause of the Constitution and its application to Obamacare.
I unabashedly praised John Oliver’s sultry singing about the IRS with Michael Bolton previously in our pages. In that ditty, Oliver pointed out we should be hating on Congress, not the IRS. Peter Reilly over at Forbes makes a good point that in Oliver’s new IRS bit, he should probably be complaining about Congress again and not the IRS about the lack of church audits (check out Section 7611, which is Congress’ doing).
Service issued guidance to its new international practice unit on transactions that might generate foreign personal holding company income under subpart F. Caplin & Drysdale have coverage here.
The Tax Court seems to have just thrown an assist to the Service in Summit Vineyard Holdings v. Comm’r, holding that an individual had apparent authority to execute an extension for the statute of limitations, even though the individual lacked actual authority. The Court somewhat saved the Service, because it probably should have known that the TMP was a different entity in the year in question, as it had been informed of the switch. The Court noted the auditing agent had very limited TEFRA knowledge (I’m not sure that excuses the IRS from properly following the rules). The agent had the manager of the then current TMP sign, instead of the TMP for the year in question. There appears to be somewhat of a split on this, but the Court determined that the Ninth Circuit (where the appeal would lie) would apply state law and find apparent authority based on the evidence and actions taken by the individual. Saved by the Court! Based on the facts, it does not seem that unfair though, as the individual was the manager of both TMPs, and it seems like he also thought he was properly executing the paperwork and extending the SOL.
In Chief Counsel Advice, the Service has concluded it can only apply the Section 6701 aiding and abetting penalty one time against a person who submitted false retirement plan application documents. This is the case even though multiple documents could be submitted with fraudulent information, and even though it could result in an understatement for the plan and each participant.
The Service has also released PMTA 2015-11, which outlines the application of the penalty under Section 6662A(c) for taxpayers who failed to disclose participation in listed transactions involving cash value life insurance to provide welfare benefits. This is a very specific issue, so I won’t go into much detail, but the guidance is fairly thorough and provides good insight into the Service’s thoughts on the matter.
And another Section 7434 case. I wrote about the Angelopolous case earlier in the week, which dealt with who was the “filer” of the information return. In US v. Bigley, the District Court for the District of Arizona reviewed whether an employee’s claim against his employer for false returns was time-barred. The suit was well past the six year statute, and the employee clearly had knowledge over the last year. Section 7343(c) outlines the statute of limitations, and states the statute is the later of six years or one year after the return is discovered by exercise of reasonable care. The Court found that the employee received the information returns upon filing, so the six year statute clearly applied, and it would be impossible to have the one year statute in that situation. The actual language is “1 year after the date such fraudulent information return would have been discovered by exercise of reasonable care.” I wonder if it would be possible to create a larger fraudulent scheme, whereby the recipient would receive the information return but not realize it was fraudulent until a later date. Would the one year statute then apply?
My brother-in-law just got a Ph.D. (congrats Alex! I doubt he will ever read this). In honor of that esteemed accomplishment, here is an infographic highlighting all kinds of negative financial and other statics related to Ph.Ds. I make no assurances to the veracity of the graphic’s claims, and I am generally in favor of graduate degrees, but I found the stats interesting.
Les and Keith ditched me for the end of last week, while they both attended the ABA Tax Section Meeting (much more on that to come). Thankfully, Carlton Smith provided two guest posts. One was on unpublished CDP orders and how those can implicate substantive and other important procedural matters, and a second on his victory in the Volpicelli equitable tolling case out of the Ninth Circuit. Thanks again to Carl for both of those and a big congratulations on the important victory.
A couple cases on administrative costs are first up. First Milligan v. Comm’r, where the IRS clearly did a poor job handling the taxpayer’s appeal, filing it incorrectly, not acting promptly (probably being difficult to contact), and requiring the Taxpayer Advocate to intervene. Based on Section 7430(f)(2), the Tax Court correctly held that the IRS CP 2000 notice and Letter 105C denying the refund were not the “position of the United States” as required under the statute. For the statute, the “position” only arises under a notice of decision by Appeals or the notice of deficiency. Prior to that date, the IRS’s position and actions don’t count for fee shifting, and fees are not available.
Switching to a taxpayer win, the District Court for New Hampshire in United States v. Baker held that the Service was not substantially justified in its position that an ex-wife’s real estate was subject to a lien from her ex-husband’s tax liability because the divorce decree (and/or deed) was not recorded transferring the property to the wife pursuant to the divorce (which occurred before the lien arose). We covered the underlying case in SumOp last year here. The District Court found the position was contrary to the First Circuit’s law on the topic and awarded costs to the real estate owner.
Moving to a different topic, Steven Mopsick published “IRS to Issue More Tickets to the Tax Court in 2015” on LinkedIn and his blog last week, which discusses changes to Letter 5262. Mr. Mopsick indicates that the changes to the document make it clear that if a taxpayer isn’t prompt in following requests for information (Form 4564), the taxpayer will no longer be able to remove the issue to Appeals in nondocketed cases, and will instead get a 90 day letter directing him to the Tax Court (where he could go to Appeals, but as a docketed case). I have not looked into this further than Mr. Mopsick’s post. In the post, it seems to indicate this is being done to reduce the Appeals backlog. If this is correct, it will be interesting to see if there is an increase in small tax court cases over the next year or two, and a corresponding decrease in Appeals cases. If, however, Appeals cases decrease, while Tax Court filings remain the same, it may indicate many taxpayers are not receiving review that they otherwise may have obtained. Given the frequency with which the IRS is incorrect and Appeals high success rate in settling matters (when someone can actually review the matter), this would be unfortunate. It would be interesting to see how often Form 4564 is issued, in what types of matters, and for what income groups. Similarly, it would be interesting to see who is not responding.
The District Court for the Western District of Wisconsin has tossed a complaint by the Freedom from Religion Foundation (I wonder what percentage of its constituents are ten year old kids who don’t want to go to church every Sunday), which sought to block the IRS from granting churches and religious organizations exemptions from reporting requirements under Section 6033. FFRF claimed that the Code section violated the establishment clause and the equal protection clause. FFRF lost a similar case in November of 2014 regarding parsonage allowances. The District Court, largely following the 7th Circuit, found that FFRF did not have standing, as it had never sought the exemption.
The Tax Court, in Lee v. Comm’r, denied the government’s motion for summary judgment on a taxpayer’s challenge to its lien imposition for failure to serve letter 1153. The Court stated that whether the letter was served was a subject to a genuine dispute as to a material fact, and, further, whether the letter was properly issued was a requirement of the statute that the Court would review regardless of whether the taxpayer raised the issue in his CDP hearing.
Last year, SumOp covered the Julia R. Swords Trust v. Comm’r, a Tax Court case discussing transferee liability and declining to apply the federal substance over form doctrine to recast a transaction being reviewed under Section 6901. The case, and various related cases, have been appealed by the Service to the Sixth Circuit. In December, the trustees were successful in moving venue to the Fourth Circuit. The Sixth Circuit found both circuits could be the appropriate venue. The Court noted the Service sought review in the Sixth Circuit because it had not held on the underlying question (at least not against the Service). Most of the action in the case had occurred in Virginia (not in the Sixth Circuit). The deficiency notice was issued in Virginia and the tax court petition was filed in Virginia, where the case was decided. The Court noted that the Service conceded venue was appropriate in the Fourth previously, but that did not preclude venue in other locations; however, the trustees had relied upon the venue statement in filing their petitions to the Tax Court. As such, it found the Fourth circuit more appropriate. This could be a slight blow to forum shopping for the Service, and perhaps taxpayers. I couldn’t find the case for free on line. Sorry.
The University of South Dakota has a football program!!!!! I had no idea – It is DI also. The program seems pretty terrible at football, but apparently some of its former players are really good at committing tax fraud.
Jack Townsend’s Federal Tax Crimes Blog has the creepiest headline of the year, Foot Kissing Chiropractor Sentenced for Bribing IRS Agent. I have two takeaways from the post. First, don’t try to bribe the IRS, you will probably go to jail. Second, don’t try to bribe the IRS after admitting to being a weirdo, you will go to jail, and all kinds of news outlets and bloggers will circulate posts about you for the world to see.
In what appears to be a really terrible case, the district court for the Southern District of Ohio has upheld delinquency penalties against an estate for failure to timely file and pay estate taxes in Specht v. United States. The executor of the estate was a high school educated homemaker who was around the age of 73. She did not own any stock, and had never been to a lawyer. When her cousin died, she retained her cousin’s lawyer, Mary Backsman, who had been an estates lawyer for decades and was well respected. Ms. Backsman was also suffering from brain cancer at the time, and did not disclose this to the executor or various other clients. The attorney claimed to be doing various tasks, including obtaining extension of time to file and pay tax. She also claimed to be contacting UPS for assistance in selling a large amount of UPS stock, and handle various other requirements. None of these tasks were actually done. Eventually, the executor realized, and fired the attorney and sued her for malpractice. Unfortunately, the attorney had similar issues with various other clients.
The executor hired a new attorney, filed the estate tax return, and paid all tax due. The IRS imposed a huge amount of penalties and interest. Due to the above facts, the executor argued the failure to file was due to reasonable cause and not willful neglect. Unfortunately, based on Treasury Regulation 301.6651-1(c)(1) and Boyle, the executor had not exercised ordinary business care, as reliance on an attorney to file does not remove the executor’s obligation to ensure the return is timely filed and the tax paid. The Court stated the executor did not need to be an expert to determine the due date. I’ve shared my frustration with this line of cases repeatedly in the past, but I do somewhat understand why the rule is crafted in this matter. I would be interested to know how the malpractice case panned out. The coverage may have a maximum payout amount, and if there were a bunch of these cases, the various clients could be dividing up a limited pie. In theory, the executor could be held liable to the beneficiaries for anything not recouped. Any result where the executor ends up responsible seem completely inequitable to me.
I’m not a fan of Hartland Management Services Inc. v. Comm’r either, which is a recent Tax Court case reforming a Form 872 that the IRS screwed up. Just when you think you get lucky, with the IRS completely blowing something, the Tax Court comes in and bails them out. Without getting too far into the facts, the taxpayer and various entities were being audited for multiple years. During the audit, the Service needed to extend the statute for assessment to continue discussing the matters. On the Form 872, the Service included the extended date as the date of the return being extended (so the form effectively extended the statute for assessment on a return that wouldn’t have been filed yet or would never be filed). The Service and the taxpayer continued to discuss the matter, and eventually the Service assessed tax. The taxpayer contested the validity of the assessment, because the Form 872 did not state the year of assessment. The Court found a mutual mistake of fact, which was evidenced by the taxpayers’ actions before and after the signing of the Form 872. Because of the mistake, the Court reformed the document to extend the appropriate year. I wonder if the taxpayers had contemporaneous notes indicating they were happy to sign because of the IRS error, and then immediately ceased negotiations if the Court would have held differently. Then it would have arguably just been an IRS error. Although I’m not sure I can create a winning legal argument against this holding, it does seem there are a lot of situations where a taxpayer could make a similar error, which was accepted by the IRS, that would never be reformed to save the taxpayer. For those interested in learning more about this topic, Saltzman and Book touches on contract principles applicable to Form 872 in the newly rewritten Chapter 8.08[b].
This post originally appeared on Forbes on December 17, 2014, and can be found here.
I know that seems like an exciting offer, but, as most readers have probably surmised, Mr. Kernan eventually drew the IRS’ ire, and was assessed taxes, penalties and interest for many of the past years where he was implementing his “How to STOP the IRS” strategies. Many of the readers–and the author of this post—are probably happy to see Mr. Kernan forced to fulfil one of his civic duties, and there is some entertainment value in person who is smug but incorrect being publicly reprimanded, but we focus on tax procedure and not humiliation. Thankfully, this backdrop provides an interesting tax procedure issue—whether or not Mr. Kernan’s proselytizing about his improper tax scheme to everyone who would listen, including on TV and to the IRS, was sufficient to insulate him from the civil fraud penalty.
Around 1993, Mr. Kernan ceased filing returns, and years 2001 through 2006 were at issue in the Tax Court case. Mr. Kernan’s interpretation of the Code was that Section 6001 required the Commissioner of the IRS to personally invite him to file a return before he was required to file or pay any tax. Contrary to Mr. Kernan’s tax philosophy, the Service issued notices of deficiency for each year for the tax due. The noticed included the failure to pay estimated taxes penalty, the failure to file penalty, the failure to pay penalty, and the applicable interest. The Service also imposed the fraudulent failure to file penalty under Section 6651(f).
Before issuing the notice, the IRS had recreated Mr. Kernan’s income by reviewing deposits made into his bank account. Kernan refused to provide records (apparently, that request too should have come from the Commish), so the IRS summonsed the information from his banks. The IRS found he had two sources of income, from which he seemed to earn a fairly nice living. First, he sold various tax avoidance products (a fool and his money are soon parted). Second, he acted as a paralegal, advising folks in IRS matters, and apparently setting up companies, trusts, doing estate planning, and other legal work.
As stated above, Mr. Kernan did not report any of this income, did not file returns, and did not pay tax. Mr. Kernan did however share this thought on Section 6001 with the Social Security Administration and the IRS by letter – perhaps multiple times. He also went on TV and discussed his strategy, and plastered his scheme all over his web page.
Before the Court, Mr. Kernan advanced his argument that he was not required to file a return until the Commissioner personally notified him that the IRS would like to review his tax information. The Tax Court tossed Mr. Kernan’s briefs and refused to review them; generally, not a strong start to a case. As a side note, the holding has an interesting discussion about the Court’s ability to do this when a party ignores the specific filing requirements. Here, the Court noted Kernan greatly exceeded the “generous page limits” for briefs that the Court had allowed in this case. The Court also stated that striking the brief didn’t matter much, because all 88 pages of initial brief and 88 pages of reply brief were garbage.
The tax, interest, and all penalties, except for the fraud penalty, were upheld. Although Mr. Kernan’s briefs were tossed, the Court did still address whether or not tax and each of the penalties should have been imposed.
[he] went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes. The letters do not support a claim of fraud; to the contrary, they make it clear that [the (non)-taxpayer] intended to call attention to his failure to pay taxes. It would be anomalous to suggest that [his] numerous attempts to notify the Government are supportive, let alone suggestive, of an intent to defraud.
Although not discussed in detail in the Kernan case, other courts have come to this same conclusion regarding protestors failing to file, requiring an affirmative act of misrepresentation. See Zell v. Comm’r, 763 F2d 1139 (10th 1985).
Other courts, including the Ninth Circuit, the Seventh Circuit, and the Tax Court when not appealable to the Third or Tenth, have found that disclosure was not sufficient in these cases to prevent the imposition of the fraud penalty. The Ninth Circuit stated, “disclosed defiance, standing alone, would not bar a finding of fraud.” Further, fraudulent intent “does not require the taxpayer hide his defiance from the IRS.” Edelson v. Comm’r, 829 F2d 828 (9th Cir. 1987).
It does not appear that the Ninth, Seventh or Tax Court holdings create a bright line that disclosure will never prohibit the imposition of the fraud penalty. Likewise, I would not be confident that the Third Circuit or Tenth Circuit opinions require the penalty to be waived in all protestor disclosures. For instance, the Third Circuit relied heavily upon the non-taxpayer’s various (and entertaining) letters, indicating those were sufficient to “dilute” the government’s case to the point where it had not proven fraud by clear and convincing evidence. Where there was less disclosure, the disclosure was less clear, there was stronger evidence of fraudulent intent, or the disclosure was simply an effort to reduce penalties, I would not be surprised if the Third and Tenth held the opposite.
It should also be noted that disclosure does not fix all fraud. For instance, if a fraudulent return is filed, and then the taxpayer attempts to disclose and fix the fraud, the Service may still be able to impose the fraud penalty, and the statute of limitations will almost certainly still be extended because of the initial fraud. This holding, and the cases discussed above, pertain to a more narrow fact pattern.
The Court in Kenan held the disclosure did not automatically mitigate the fraud, and went on to determine if the taxpayer had the customary badges of fraud required for the imposition of the penalty. The Court determined, probably correctly, that Mr. Kenan in good faith believed his interpretation was correct, which was sufficient to erode the government’s attempt to show the intent to defraud by clear and convincing evidence.
A few parting thoughts. Depending on where you reside, if you espouse your cockamamie tax ideas loud enough and often enough (and actually believe them), the fraud penalty may not be upheld; however, that is not a sure thing in any jurisdiction in my mind. In addition, unless you have a new tax protestor idea, the Service can use your statements against you, as the rehashed failed protestor arguments can be an evidence of an intent to defraud on the part of the taxpayer – this does still generally require an affirmative action indicting something false to the IRS though.
Congress has also enacted a specific Code Section for protestors. Section 6702 allows for an additional $5,000 penalty for frivolous returns or other submissions if they are based on positions identified as being frivolous in a published list, or reflect a desire to delay or impede tax administration. Again, being creative and original in your balderdash should help.
Interestingly, had Mr. Kernan argued he was doing this as a “test case” for his position, which was also his livelihood, the Tax Court may have also considered that as a mitigating factor for fraud. This would have shown a different intent. The Tax Court has stated that full truthful disclosure of an intention to present a test case could be a mitigating factor in a fraud penalty case. See Habersham-Bey v. Comm’r, 78 TC 304 (1982). I’m not aware of any actual holdings in favor of taxpayers on that argument, but it is possible.
And to conclude, the IRS and the Tax Court do not believe “How to STOP the IRS” is an accurate title, but Mr. Kernan was successful in thwarting the fraud penalty—there was, however, a substantial cost in other penalties, interest, time and perhaps some embarrassment in obtaining that Pyrrhic victory.

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