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They, however, did not report this payment on their 1987 tax
return.
In 1990, respondent audited petitioners' 1987 Federal income
tax return. During their initial meeting with an Internal
Revenue Service (IRS) auditor, petitioners submitted records,
canceled checks, and receipts. Some of the receipts related to
medical and employee expenses for which petitioners previously
had been reimbursed. At the next meeting, pursuant to the
auditor's request, petitioners submitted their 1988 and 1989
records. The auditor asked petitioners whether they had altered
certain checks relating to 1987, 1988, and 1989. Petitioners
admitted that they had altered these documents. Respondent then
initiated a criminal investigation of petitioners. In October
1992, after being notified of the criminal investigation,
petitioners amended their 1987, 1988, and 1989 Federal tax
returns. Petitioners' numerous adjustments resulted in
additional reported taxable income of $46,969, $58,018, and
$55,735 for 1987, 1988, and 1989, respectively.
In April 1994, petitioners were charged, pursuant to section
7201, with evading income tax. On November 1, 1994, Mr. Shah
pleaded guilty to tax evasion relating to 1989, was sentenced to
13 months in prison, and was ordered to pay a $100,000 fine and
$48,626 in restitution. Mrs. Shah pleaded nolo contendere to
providing the IRS with fraudulent information, was placed on 2
years probation, and was ordered to pay a $50,000 fine.
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