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revenues from the construction business in the millions of
dollars.
Petitioner began to question Mr. Borrelli’s tax preparation
methods only in 2001. Petitioner asked another accountant, Ed
Lampe, to review the return for 2000 that Mr. Borrelli had
prepared. Mr. Lampe informed petitioner that a few things on the
return caused him concern about Mr. Borrelli. The return
reported not only did petitioners owe no taxes, but that
petitioners were claiming an earned income credit, despite the
$2.7 million Schedule C gross revenues. Petitioner became
concerned about Mr. Borrelli after hearing from Mr. Lampe, but
petitioner did not fire Mr. Borrelli at that time.
Unbeknownst to petitioners, Mr. Borrelli was arrested and
charged in 2002 for filing fraudulent tax returns. In November
2002, respondent sent a letter to petitioners notifying them that
they were under audit for the years at issue. Petitioners relied
on Mr. Borrelli to represent them, but they ultimately fired him
in November 2003 because of his mishandling of the audit. Mr.
Borrelli has been serving a 33-month prison sentence for crimes
relating to filing fraudulent returns since May 2004.
Respondent sent petitioners statutory notices of deficiency
dated November 26, 2003, for the years at issue. Respondent
determined increases in petitioners’ taxable income of $1,664,834
in 1999, $2,508,952 in 2000, and $3,056,833 in 2001. Respondent
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