The courts have taken an expansive view as to what counts as fraud for tax matters. Some courts have even said taxpayers can be held accountable for fraud committed by their tax return preparers.
When considering fraud, there is a question as to what activities are considered. Take for example the civil tax fraud penalty. This civil penalty applies to understatements of tax. This means that the relevant timeframe would seem to be the time leading up to and culminating with the filing of the tax return. Once the tax return is filed, the fraudulent has been completed.
What about additional actions by the taxpayer to further the fraud? For example, submitting false or altered documents to the IRS auditor who is examining the fraudulent tax return? Can those actions be considered evidence of fraud for the understatement of tax? The court recently answered this question Chopra v. Commissioner, T.C. Memo. 2025-2.
Facts & Procedural History
The taxpayer in this case is a healthcare consultant. She has several advanced college degrees.
The case involves her 2019 individual income tax return. The taxpayer filed her tax return and reported substantial business expense deductions and itemized deductions. This included more than $68,000 in medical expenses and nearly $90,000 in business expenses.
The IRS pulled her tax return for audit and requested documentation to substantiate the claimed deductions. The IRS auditor proposed adjustments for the larger items on the tax return and also proposed a civil fraud penalty.
The civil fraud penalty was due to the taxpayer’s failure to cooperate. This continued during the litigation in the tax court. The court described the conduct by the taxpayer as follows:
- She provided only partial credit card statements to the IRS auditor (5 months out of 12)
- She refused to produce partnership tax returns and agreements for the flow through income
- She made false representations to the court about discussing matters with opposing counsel
- She provided documents that appeared to be digitally altered
- She offered implausible explanations when questioned about inconsistencies
The tax court ultimately upheld both the underlying tax deficiency and a civil fraud penalty. This article focuses on the fraud penalty.
Traditional Badges of Fraud vs. Procedural Conduct
The civil tax fraud penalty is found in Section 6663 of the tax code. It is a very short statute that just says that the taxpayer can be liable for a 75 percent penalty for any underpayment of tax that is attributable to fraud.
The IRS has the burden to prove that there was tax fraud. To do this, the IRS has to show that the taxpayer engaged in conduct with the intent to evade taxes that he knew or believed to be owing. The IRS also has to prove that the understatement of tax was due to the fraud.
There are several prerequisites implicit in these rules. For example, the taxpayer has to actually file a tax return. This provides one “out” for this penalty. For example, a document that is filed that does not qualify as a “tax return” cannot trigger this penalty. The tax return may not have to be signed for there to be fraud, but it does have to be intended to be a valid tax return and it has to be filed. Those who file a frivolous tax return or those do not file a tax return cannot be subject to this penalty.
As a separate note, it is often advisable to file a tax return, even if the tax return is being filed late, to get the statute of limitations for the IRS to audit and make an assessment. However, the tax return has to be an honest and truthful return to avoid for this to work and to avoid the fraud penalty. The taxpayer then has to contend with the late filing penalty.
Also, those who do not believe that intentionally file a false return under a genuine belief that they are complying with the law do not trigger this penalty. These concepts are not set out in the tax code. They are found in various court cases involving this penalty.
The Badges of Fraud
Section 6663 also does not provide a definition for the term “fraud.” The courts have developed factors that are used to establish fraud. These so-called “badges of fraud” typically focus on the taxpayer’s conduct at or before the time of filing of the tax return, such as:
- Maintaining false books and records
- Creating fictitious documents
- Concealing income or assets
- Making false statements to investigators
- Dealing extensively in cash
- Filing false documents
There are quite a few court cases that apply factors like these. The courts have largely said that no one factor is determinative, and then they essentially pick the set of factors that are relevant to the case. In many cases there is one fact triggers several of these factors, such as in cases where a fictitious business is reported on a tax return for a tax loss. The business is reported on the return, but the taxpayer may maintain false books and records or create false or fictitious documents to support it–as the court suggested that the taxpayer did in this case.
The tax court cases that address fraud penalties are largely sustained in the IRS’s favor. Even in those cases where the taxpayers prevail on the fraud penalty, the tax court still usually imposes the lesser 20 percent accuracy or negligence penalty.
Conduct After the Tax Return is Filed
This brings us to the question posed by this article. Can conduct after the tax return is filed be considered as one of the “badges of fraud” for the understatement of tax on the tax return?
The understatement of tax happened at the time the tax return was filed. By the time the IRS audits the tax return, several years have usually passed. By the time the case gets to tax court, several more years have passed.
This Chopra case is a prime example. It is a tax court case with an opinion issued in 2025 for a 2019 income tax return. The court in Chopra did in fact find that the taxpayer’s post-tax return filing conduct supports a finding of fraud for the civil tax fraud penalty.
The tax court specifically identified several aspects of the taxpayer’s procedural conduct as badges of fraud:
- Failure to cooperate with tax authorities
- Providing implausible or inconsistent explanations
- Offering testimony lacking credibility
- Refusing to produce relevant documents
- Making false representations to the court
The tax court even noted that the taxpayer’s “duplicitous and obstructive behavior throughout this [court] case is a badge of fraud” for the Section 6663 penalty.
The court made this ruling even though it has its own separate penalty for fraudulent conduct during tax litigation which is found in Section 6673. The Section 6673 penalty is limited to $25,000, which the Section 6663 fraud penalty is not. The opinion does not address the Section 6673 penalty so, presumably, the court did not impose this additional penalty.
The Takeaway
This case shows that conduct during tax audit and litigation matters as it can be additional evidence of fraudulent intent for any understatement on the tax return. Producing fraudulent documents to the IRS auditors and making false statements to the court can be evidence of fraudulent intent. While taxpayers retain their rights to challenge IRS positions and limit document production, they should exercise these rights in a way that doesn’t create additional evidence of fraud.
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