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believed to be owing. See Gajewski v. Commissioner, 67 T.C.
181, 199 (1976), affd. without published opinion 578 F.2d 1383
(8th Cir. 1978). Because fraudulent intent can seldom be
established by direct proof of the taxpayer’s intention, fraud
may be proved by circumstantial evidence. See Clayton v.
Commissioner, 102 T.C. 632, 647 (1994); DiLeo v. Commissioner,
supra at 874. While no single factor is necessarily sufficient
to establish fraud, the existence of several indicia or “badges”
of fraud is persuasive circumstantial evidence of fraud. See
Petzoldt v. Commissioner, supra at 700. Badges of fraud
include, but are not limited to: (a) A substantial and
consistent understatement of income; (b) dealing in cash; (c)
participation in an illegal activity which is the likely source
of income; (d) failure to maintain adequate records; and (e)
failure to furnish the return preparer with accurate
information. See Clayton v. Commissioner, supra at 647;
Petzoldt v. Commissioner, supra at 700; Bacon v. Commissioner,
T.C. Memo. 2000-257.
a. Substantial and Consistent Understatement of Income
Petitioners substantially and consistently understated
their income for each of the years at issue. From 1987 to 1990,
petitioners failed to report approximately $150,000 of income.
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