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understatements of income, which in turn resulted in
underpayments of tax for each year.
We hold for respondent on this issue.
B. Fraudulent Intent
Respondent contends that the following indicia of fraud are
present in the instant case: (1) Petitioners failed to report
substantial amounts of income; (2) petitioners failed to keep
adequate books and records; and (3) petitioners made inconsistent
and implausible explanations regarding the alleged nontaxable
sources of deposits to their bank accounts during 1994 and 1995.
Petitioners maintain that: (1) Michael had no intention to
underreport income; (2) Michael provided the records he had to
respondent throughout the administrative process; and (3) the
alleged inconsistent statements “make no sense at all”.
Courts have identified numerous factors, sometimes referred
to as indicia of fraud, or badges of fraud, which may be
persuasive circumstantial evidence of fraud. See, e.g.,
Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992). We focus
on those indicia that appear to be most significant in the
context of the record in the instant case.
(1) Failure To Report Substantial Amounts of Income
“Although mere understatement of income alone is not
sufficient to prove fraud, the consistent and substantial
understatement of income is, by itself, strong evidence of
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