Tax Type
Individual Income Tax
Description
Penalties for fraud
Topic
Collection of Tax
Penalties and Interest
Date Issued
05-14-1987
May 14, 1987
Re: §58.1-1821 Application/ Individual Income Tax
Dear ****************************
This will reply to your letter of December 16, 1986 and additional information remitted by letter dated March 4, 1987, on behalf of *********** (taxpayer) seeking the correction of assessments issued in the above referenced case for taxable years 1981, 1982 and 1983.
FACTS
The taxpayer was found guilty of having embezzled over ***** from her former employer between 1981 and 1983. Assessments were accordingly issued to the taxpayer for additional income taxes, fraud penalties and interest based on the total amount embezzled. The taxpayer contests the assessment of penalties in this case contending that she neither knew that a crime was being committed nor had any intention to evade paying tax on all of her income.
In addition, the taxpayer seeks adjustment of the 1983 assessment to take into consideration restitution payments made to her former employer.
DETERMINATION
Section 58 1-308 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 fraudulent 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).
- 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 fraudulent 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).
The term fraud is defined to mean "[a] false representation of a matter of fact whether by words or by conduct by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury." Black's Law Dictionary, Fifth Edition, p. 594. The term "fraud" as applied by the Federal Tax Court means an actual intentional wrongdoing with a specific intent to evade a tax believed to be owing See, L. F. Ratterman, TC Memo Op. Dkt. 11319 (1948) aff'd 177 F 2d 204 (CA 6th, 1949).
Other federal courts have upheld the imposition of fraud penalties in cases where the evidence showed that the taxpayer was convicted of embezzling funds. In Rogers v Commissioner of Internal Revenue, 111 F. 2d 987 (6th Cir. 1940), the court stated, "[i]t is a fair inference that a man who will embezzle funds in his charge will not hesitate to understate his income with intent to defraud the government. Size and frequency of omission of income must also be considered in determining whether there was intent to defraud. Substantial omission of income occurring over a period of time must be considered as strong evidence of fraud. See Holland v. United States, 348 U.S. 121, 75 S.Ct. 127 (1954).
Furthermore, while "[i]solated 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) 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 addition, based on Virginia Code §58. 1-322, Virginia is bound by federal adjusted gross income in determining the Virginia taxable income of individuals with the modifications specified in that section Therefore, in the absence of specific statutory authority to the contrary, the department may not unilaterally adjust an individual's Virginia taxable income for any year in which an adjustment has not also been made to such individual's federal adjusted gross income.
However, Virginia Code §58.1-1823 provides that a taxpayer may file an amended tax return claiming that the amount of tax assessed and previously paid exceeded the proper amount due, within three years from the last day prescribed by law for the timely filing of the return, or within sixty days from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based, whichever is later." (Emphasis). Therefore, the taxpayer in this case may file amended returns with the department, within the statutory period stated above, for any of the years during which restitution payments were made, claiming a deduction for the amounts so repaid after payment of the assessments and after providing the department with proof that the Internal Revenue Service has accepted amended returns from the taxpayer claiming a deduction for such restitution payments for the same years.
Based on the uncontradicted facts presented the department was justified in assessing the taxpayer for the additional tax, penalties and interest in this case. Accordingly, I find no basis for correction of any portion of the assessments which have been issued.
Therefore, the assessments issued in this case are now due and payable in full. However, in lieu of payment of all of the assessments at this time taxpayer may remit to the department, within thirty days of the date of this letter, a plan of payment, together with the first payment thereunder which will result in payment of all amounts due over a period of not more than 60 months Such plan of payment should be sent to Supervisor of the Department's Collection Section, Office Services Division, P.O. Box 6-L, Richmond, Virginia 23282. If **********such plan of payment is not received by the department within thirty days, collection action will be instituted for the immediate payment of the full amount of the amount of
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner