-38-
Cir. 1984). The courts have developed a number of objective
indicators or "badges" of fraud. Recklitis v. Commissioner, 91
T.C. 874, 910 (1988). Several badges of fraud are present in
this case: (a) Substantially underreporting income for several
years; (b) receiving income from illegal sources; (c) maintaining
inadequate records; (d) destroying records; (e) providing
incomplete or false information to the tax return preparer; (f)
filing false payroll tax returns; (g) giving implausible or
inconsistent explanations of behavior; and (h) using cash and
cashier's checks extensively. Bradford v. Commissioner, 796 F.2d
303, 307-308 (9th Cir. 1986), affg. T.C. Memo. 1984-601; Ruark v.
Commissioner, 449 F.2d 311, 312-313 (9th Cir. 1971), affg. T.C.
Memo. 1969-48.
a. Pattern of Large Understatements of Income
Consistently underreporting income for several years,
especially with discrepancies of 100 percent or more between net
income and net income reported on tax returns, is a badge of
fraud. Holland v. United States, supra at 137-139; Estate of
Mazzoni v. Commissioner, 451 F.2d 197, 202 (3d Cir. 1971), affg.
T.C. Memo. 1970-37 and T.C. Memo. 1970-144. Petitioners reported
income of $38,334 in 1983, $37,161 in 1984, $94,187 in 1985,
$32,873 in 1986, and $6,720 in 1987. They underreported their
income by $82,961 in 1983, $45,598 in 1984, $8,608 in 1985,
$60,788 in 1986, and $29,822 in 1987. They both knew that they
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