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From this third-party information, the IRS began to reconstruct
petitioners’ gross income and expenses.
On May 27, 2005, the IRS mailed to petitioners the statutory
notice of deficiency. After the notice of deficiency was sent,
petitioners’ counsel notified the IRS that the previously
requested documents were available for review at his office.
Petitioners’ counsel also provided copies of the documents to the
IRS. Much of the information regarding particular payments made
by or to petitioners, however, was gathered from third parties,
such as from petitioners’ bank, and was not evident from the
books and records provided by petitioners. Petitioners
themselves never provided any explanation of the documents or how
they had calculated their gross income and expenses for the years
in issue.
OPINION
The penalty in the case of fraud is a civil sanction
provided primarily as a safeguard for the protection of the
revenue and to reimburse the Government for the heavy expense of
investigation and the loss resulting from the taxpayer’s fraud.
Helvering v. Mitchell, 303 U.S. 391, 401 (1938); Sadler v.
Commissioner, 113 T.C. 99, 102 (1999). Respondent has the burden
of proving, by clear and convincing evidence, an underpayment for
those years in issue and that some part of the underpayment for
each of those years was due to fraud. Sec. 7454(a); Rule 142(b).
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Last modified: May 25, 2011