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affg. T.C. Memo. 1984-601. Dealing in cash is also considered a
“badge of fraud” by the courts because it is indicative of a
taxpayer’s attempt to avoid scrutiny of his finances. See id. at
308.
Respondent’s burden regarding the underpayment of tax in
support of the fraud penalty has been met. Petitioners have
conceded overstatements of expenses and of costs of goods sold
and understatements of gross receipts for the years in issue.
Those misstatements resulted in substantial understatements of
petitioners’ tax liability for those years.
The evidence in this case establishes many “badges of
fraud”. It is undisputed that petitioners substantially
understated their income for each of the years in issue. For
2000, petitioners did not file a tax return until June 2002, and
then only after receiving a letter from the IRS requesting that a
2000 return be filed. Petitioners’ substantial understatements
of income for all tax years in issue and their initial failure to
file a tax return for 2002 are both indicia of fraud. See id. at
307.
Petitioners failed to cooperate with respondent by not
responding to several letters from the IRS requesting interviews
and information, not submitting documents requested by the IRS
agent conducting the audit, and failing to appear at scheduled
interviews. Petitioners did not provide the agent with any
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