Taxpayer Held Liable for Civil Fraud Penalty after Plea to Tax Evasion for One of the Years (9/2/17; 9/10/17)

In Cantrell v. Commissioner, T.C. Memo. 2017-170, here, the Court sustained the civil fraud penalty based on the taxpayer's plea agreement to tax evasion for one of the years (2002) and the pattern of conduct related to other years.  In the criminal case, the taxpayer had also pled to a scheme of bribery related to his official position as a Government employee.

The Tax Court's determination that facts supported the civil fraud penalty (including collateral estoppel for 2002) is not particularly exceptional. It might be a good read for students and young lawyers.

The Court also held that the taxpayer had filed valid tax returns sufficient to permit the civil fraud penalty.  The civil fraud penalty in § 6663 and the accuracy related penalty in § 6662 apply only to underpayments with respect to filed tax returns.  § 6664(b).  The taxpayer here claimed that, because he filed electronically through TurboTax for most of the years, there was no valid return because he did the electronically filed returns did not have his actual signature.  The Court held that he had filed sufficient returns for the civil fraud penalty.  This portion of the opinion is worth quoting:

Section 6011(a) provides that "any person made liable for any tax * * * shall make a return * * * according to the forms and regulations prescribed by the Secretary." A return required to be filed by "the internal revenue laws or regulations shall contain or be verified by a written declaration that it is made under the penalties of perjury." Sec. 6065. 

Section 6061(a) provides the general rule that "any return, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with the forms or regulations prescribed by the Secretary." Section 301.6061-1(b), Proced. & Admin. Regs., provides further that the method for signing may be prescribed in "forms, instructions, or other appropriate guidance". 

In 1998 Congress enacted the IRS Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. No. 105-206, sec. 2001, 112 Stat. at 723, which provides, inter alia, that it is Congress' policy that the IRS implement guidelines for electronic filings with the hope that the IRS would achieve 80% electronic filing by 2007. See H. Conf. Rept. No. 105-599, at 234-235 (1998), 1998-3 C.B. 747, 988-989; S. Rept. No. 105-174, at 39-42 (1998), 1998-3 C.B. 537, 575-578. RRA 1998 sec. 2003(a)(2), 112 Stat. at 724, amended section 6061 by adding subsection (b). The Secretary thereby is required to develop procedures for the acceptance of signatures in digital or other electronic form; and until such time as such procedures are in place, the Secretary may waive the requirement of a signature or provide for alternative methods of signing or subscribing a return. Sec. 6061(b). Thus, the strict requirements for the filing of a paper return by an agent do not apply with full force to electronically filed returns. 

IRS Publication 1345, Handbook for Authorized IRS e-file Providers, provides guidance for the electronic filing of Federal income tax returns by Electronic Return Originators (EROs), such as TurboTax, including the signature requirement. IRS Publication 1345 has been in effect since before the years at issue. Accordingly, where it is clear that a preparer had actual authority to electronically file a return for a taxpayer, the Secretary acts within his discretion in  waiving the signature requirements. Ballantyne v. Commissioner, T.C. Memo. 2010-125, slip op. at 7. 

We here find as fact that the joint returns filed by petitioner and his then wife for the years at issue met the signature requirements adopted by the IRS.