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On August 25, 1997, Agent Sutton prepared and sent a
Referral Report of Potential Criminal Fraud Cases to the Criminal
Investigation Division (CID) of the IRS with respect to
petitioners, Beacon, and ISOA, Inc., for the taxable years under
examination (the criminal fraud referral). The criminal fraud
referral for petitioners and Beacon was based, in part, on the
substantial overstatement of deductions with respect to income
and the overall incompleteness of documentation provided by
petitioners at that point in the examination. With respect to
ISOA, Inc., the criminal fraud referral was based largely on the
$195,000 of “deferred income” from licensing fees that was
omitted from income and classified by ISOA, Inc., as “Advanced
Royalties” on the 1995 return. Special Agent Mike Metzler of the
CID informed petitioners that their individual returns for the
taxable years at issue were under a criminal fraud investigation.
On January 20, 1998, Agent Sutton issued a Revenue Agent’s
Report (RAR) with respect to petitioners’ 1992 taxable year (1992
RAR). The 1992 RAR proposed an income tax deficiency of $14,750
and total penalties of $14,604. The 1992 RAR, in part,
disallowed all of petitioners’ claimed Schedule C deductions on
the basis that ISOA Consulting was not a trade or business and
that the claimed expenses were either nondeductible personal
expenses or that they had been deducted by petitioners elsewhere
on the 1992 return.
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Last modified: November 10, 2007