IRS: Thou Shalt Not Skim!

That’s the message to taxpayers from the recent Tax Court decision in the Musa case.

The story is that this bloke owned a restaurant, and decided to simply not report as revenue significant amounts of cash which he skimmed from the restaurant’s take.  If that were not enough, he also apparently lied to his accountant and payroll service company, and committed other nefarious deeds, resulting in his liability for the IRS’ civil fraud penalty associated with his entire tax underpayment – a hefty 75% penalty when facts like this are determined.

When the IRS latches on to a situation like this, they are inevitably led to an effort to prove factors which the courts have defined as “badges of fraud” – direct and circumstantial evidence in support of the fact that the taxpayer just outright cheated Uncle Sam out of the dough.  These “badges” include:

  • Understating income
  • Maintaining inadequate records
  • Implausible or inconsistent explanations of behavior
  • Concealment of income or assets
  • Failing to cooperate with tax authorities
  • Engaging in illegal activities
  • An intent to mislead which may be inferred from a pattern of conduct
  • Lack of credibility of the taxpayer’s testimony
  • Filing false documents
  • Failing to file tax returns
  • Failing to make estimated payments, and
  • Dealing in cash

Musa managed to badge himself with a number of these, resulting in the finding of the Tax Court.

And for you California taxpayers out there, be aware that the Franchise Tax Board never ceases working on ways to improve and enhance its electronic communications with taxpayer-folk, including a system which will allow taxpayers to elect to receive all communications and notices from the FTB electronically, rather than via snail mail.  Plans are that this new system will be available by July 1, 2015.

And finally, this week, as April 15 looms, don’t forget that your favorite Franchise Tax Board allows an automatic and paperless extension process.  Nothing to file, unless you owe dough, and you have until October 15 to get your actual return in!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at [email protected].

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