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employees of HRDC and that Mr. Payne was due to receive
$45,060.50 in extras in 1994. The extras were not reported on
HRDC’s or petitioners’ 1994 returns. Therefore, petitioners made
underpayments of tax for 1993, 1994, and 1995.
B. Fraudulent Intent
Because direct evidence of fraud is rarely available, fraud
may be proved by circumstantial evidence and reasonable
inferences from the facts. Petzoldt v. Commissioner, 92 T.C.
661, 699 (1989). Courts have developed a nonexclusive list of
factors, or “badges of fraud”, that demonstrate fraudulent
intent. Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
These badges of fraud include: (1) Understating income, (2)
maintaining inadequate records, (3) implausible or inconsistent
explanations of behavior, (4) concealment of income or assets,
(5) failing to cooperate with tax authorities, (6) engaging in
illegal activities, (7) an intent to mislead which may be
inferred from a pattern of conduct, (8) lack of credibility of
the taxpayer’s testimony, (9) filing false documents, (10)
failing to file tax returns, and (11) dealing in cash. Id.; see
also Spies v. United States, 317 U.S. 492, 499 (1943); Recklitis
v. Commissioner, 91 T.C. 874, 910 (1988). Although no single
factor is necessarily sufficient to establish fraud, the
combination of a number of factors constitutes persuasive
evidence. Niedringhaus v. Commissioner, supra at 211.
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