Tax Type
Individual Income Tax
Description
Fraud penalty
Topic
Penalties and Interest
Date Issued
06-06-1985
June 6, 1985
RE: §58.1-1821 Application/Individual Income Tax
Dear ****
This will reply to your letter of March 19, 1985, on behalf of ***** (Taxpayers), requesting abatement of an assessment issued in the above referenced case.
FACTS
It is undisputed that Taxpayers have been assessed tax, fraud penalty, and interest for their involvement in an organization found to be fraudulent by the Internal Revenue Service. Taxpayer's involvement in the organization encompassed taking a vow of poverty, establishing their own church, and, between 1979 and 1983, deducting all or part of their taxable income as charitable contributions. The department dis-allowed a portion of the contribution and issued assessments accordingly. Taxpayers contest this disallowance and the imposition of fraud penalties and interest, but offer no facts in support of their contention.
DETERMINATION
§58.1-398 of the Virginia Code states,
"If the amount of tax computed by the Department is greater than the amount theretofore assessed, the excess shall be assessed by the Department,...(and) If the understatement is false or fraud-ulent with intent to evade the tax, a penalty of 100% shall be added together with interest on the tax at a rate determined in accordance with §58.1-15, from the time the return was required by law to be filed until paid." (Emphasis added)
Furthermore, §630-2-308(B) of the Virginia Individual Income Tax Regulations states, "The penalty for the filing of a false or fraudulent return with intent to evade the tax will be assessed against a taxpayer whenever the complementary federal fraud penalty is assessed against such taxpayer for the same taxable year or non the basis of the facts in each particular case."
The term "fraud" means actual intentional wrongdoing with a specific intent to evade a tax believed to be owing. L. F. Ratterman, TC Memo Op. Dkt 11319 (1948) aff'd. 177 F2d 204 (CA 6th, 1949).
In addition, while "Isolated errors or discrepancies in records may be insufficient to establish a fraudulent intent to evade tax, where large amounts of income unquestionably received are consistently and repeatedly omitted from tax returns, and where the explanation for such omissions is patently weak or incredible, then the conclusion is inescapable that the taxpayer intended to understate his true income." James P. Hayes, TC Memo (1960-221); George J. Klevenhagen, TC Memo Op. Dkt. 209296 (1950); Ivan B. Reash, TC Memo Op. Dkt. 35691 (1953). And, "Understatements of income cannot be attributed to mere inadvertence, neglect, or ignorance where the understatements are so large, so regular, and so frequent as to show a deliberate intention to defraud." Ray Shaban, TC Memo, Op. Dkt. 32902 (1952).
In the present case, taxpayers willingly and intentionally participated in an organization whose sole purpose was to defraud the state and federal government out of income taxes lawfully due and payable.
The department is justified in imposing all interest and penalties which have heretofore been assessed in this case based on the undisputed facts presented. Those facts include taxpayer's willful and deliberate deduction of most or all of their taxable income from federal adjusted gross income for the years 1979 through 1983 as charitable contributions to an organization which has been found to be fraudulent, and whose principal officers have been found guilty of conspiracy to promote unlawful tax evasion.
We, theretofore, find in this case that taxpayer's conduct in deducting most or all of their taxable income as charitable contributions on a regular and consistent basis was fraudulent and in violation of Virginia law.
Based on all of the above, I find no basis for correction of the assessment in this case, the entire amount of which is hereby immediately due and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner