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and reasonable inferences properly to be drawn therefrom. See
Otsuki v. Commissioner, 53 T.C. 96, 106 (1969). Any conduct, the
likely effect of which would be to mislead or to conceal may
establish an affirmative act of evasion. See Spies v. United
States, 317 U.S. 492, 499 (1943).
The courts have relied upon a number of indicia of fraud in
deciding whether an underpayment of tax is due to fraud. While
no single factor is necessarily sufficient to establish fraud,
the existence of several indicia is persuasive circumstantial
evidence of fraud. See Petzoldt v. Commissioner, 92 T.C. 661,
700 (1989).
Respondent argues that the following factors or “badges” of
fraud are present in this case: (1) A substantial and consistent
understatement of income; (2) false statements made by
petitioners during their interview with respondent’s agents; (3)
extensive dealings in cash; (4) failure to maintain adequate
records; and (5) failure to furnish their return preparer with
accurate information.
1. Substantial and Consistent Understatement of
Income
The consistent failure to report substantial amounts of
income over a number of years, standing alone, is effective
evidence of fraudulent intent. See Schwarzkopf v. Commissioner,
246 F.2d 731, 734 (3d Cir. 1957), affg. and remanding on another
issue T.C. Memo. 1956-155. In this case, there is a substantial
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