Court Grants Taxpayers' Motion for Summary Judgment on Proposed Civil Fraud Penalty
By Joel N. Crouch on February 18, 2025
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Joel N. Crouch
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If a taxpayer cannot resolve a dispute with either IRS examination or with the IRS Office of Appeals regarding tax and penalties, the IRS will send the taxpayer a Notice of Deficiency (NOD), sometimes referred to as a 90 Day Letter. A taxpayer has 90 days to dispute the NOD by filing a petition in the United States Tax Court. If a taxpayer does not file a timely petition with the Tax Court, the IRS will assess tax and penalties in the NOD plus applicable interest. If the taxpayer still wants to dispute the assessment, he must pay the liability, file a claim for refund and if the IRS denies the refund claim, file a refund suit in either U.S. District Court or the Court of Federal Claims.
Although the Tax Court is the preferred forum for resolving a NOD because it does not require prepayment, I have written several times about the hidden dangers of filing a Tax Court petition, (HERE), (HERE) and (HERE). Those blog posts discuss cases where the IRS issued a NOD that did not include a 75% civil fraud penalty, the taxpayer filed a petition in Tax Court and either when the IRS filed its answer or shortly thereafter, the IRS upped the penalty ante by proposing a 75% civil fraud penalty. Admittedly, all of these cases had very bad facts and actions by the taxpayers, but it is something to keep in mind when deciding how and if to respond to a NOD.
A recent ruling in Casaubon v. Commissioner, No. 11304-24, had a related, but slightly different twist, on a civil fraud penalty, and in this case the taxpayers prevailed. In Casaubon, the IRS NOD proposed additional tax for two years and a 75% civil fraud penalty for each year. The taxpayers filed a Tax Court petition disputing that they owed any tax and even if they did, they were not liable for the civil fraud penalty. In its answer the IRS admitted and denied the statements of the petition but did not affirmatively allege any facts in support of the proposed civil fraud penalty. One exception to the taxpayer having the burden of proof in a tax court case is the civil fraud penalty for which the IRS has the burden of proof. When the NOD includes a civil fraud penalty, the IRS answer will typically include facts to support the proposed penalty. If the answer includes facts supporting a civil fraud penalty, the court will order the taxpayer to file a response either agreeing to or denying the alleged facts.
The Casaubon case is currently set for trial on March 3, 2025, and on January 2, 2025 the taxpayers filed a motion for judgment on the pleadings with respect to the penalties arguing that the IRS answer to the petition “failed to make any allegations of fraud against either petitioner” and therefore the taxpayers “are entitled to summary judgment with respect to the penalties”. The court ordered the IRS to file a response to the motion and on the same day the IRS filed a motion for leave to amend its answer to affirmatively allege facts in support of the proposed fraud penalty. The taxpayers filed an objection to the motion to amend claiming that the new allegations were “vague and conclusory” and without “sufficient content” for the taxpayers to adequately prepare for trial. In addition, the taxpayers said that because the case was set for trial in less than 60 days, the new allegations were too late.
Tax Court Judge Jeffrey Arbeit denied the IRS motion for leave to amend its answer and granted the taxpayers’ motion regarding penalties. The court said that allowing the government to amend its answer less than 60 days before trial would be unfair to the taxpayers and create the “wrong incentive”. The court agreed with the taxpayers that the government’s motion contained vague and conclusory allegations without sufficient content for the taxpayers to adequately prepare a reply. The court was bothered by the government’s acknowledgement that it had been aware of the facts which they alleged supported the fraud penalty when it issued the NOD but only filed the motion for leave to amend in response to the taxpayers’ motion for summary judgement regarding penalties.
If you have any questions about this article or any civil or criminal tax matter, please contact me at (214) 749-2456.
Although the Tax Court is the preferred forum for resolving a NOD because it does not require prepayment, I have written several times about the hidden dangers of filing a Tax Court petition, (HERE), (HERE) and (HERE). Those blog posts discuss cases where the IRS issued a NOD that did not include a 75% civil fraud penalty, the taxpayer filed a petition in Tax Court and either when the IRS filed its answer or shortly thereafter, the IRS upped the penalty ante by proposing a 75% civil fraud penalty. Admittedly, all of these cases had very bad facts and actions by the taxpayers, but it is something to keep in mind when deciding how and if to respond to a NOD.
A recent ruling in Casaubon v. Commissioner, No. 11304-24, had a related, but slightly different twist, on a civil fraud penalty, and in this case the taxpayers prevailed. In Casaubon, the IRS NOD proposed additional tax for two years and a 75% civil fraud penalty for each year. The taxpayers filed a Tax Court petition disputing that they owed any tax and even if they did, they were not liable for the civil fraud penalty. In its answer the IRS admitted and denied the statements of the petition but did not affirmatively allege any facts in support of the proposed civil fraud penalty. One exception to the taxpayer having the burden of proof in a tax court case is the civil fraud penalty for which the IRS has the burden of proof. When the NOD includes a civil fraud penalty, the IRS answer will typically include facts to support the proposed penalty. If the answer includes facts supporting a civil fraud penalty, the court will order the taxpayer to file a response either agreeing to or denying the alleged facts.
The Casaubon case is currently set for trial on March 3, 2025, and on January 2, 2025 the taxpayers filed a motion for judgment on the pleadings with respect to the penalties arguing that the IRS answer to the petition “failed to make any allegations of fraud against either petitioner” and therefore the taxpayers “are entitled to summary judgment with respect to the penalties”. The court ordered the IRS to file a response to the motion and on the same day the IRS filed a motion for leave to amend its answer to affirmatively allege facts in support of the proposed fraud penalty. The taxpayers filed an objection to the motion to amend claiming that the new allegations were “vague and conclusory” and without “sufficient content” for the taxpayers to adequately prepare for trial. In addition, the taxpayers said that because the case was set for trial in less than 60 days, the new allegations were too late.
Tax Court Judge Jeffrey Arbeit denied the IRS motion for leave to amend its answer and granted the taxpayers’ motion regarding penalties. The court said that allowing the government to amend its answer less than 60 days before trial would be unfair to the taxpayers and create the “wrong incentive”. The court agreed with the taxpayers that the government’s motion contained vague and conclusory allegations without sufficient content for the taxpayers to adequately prepare a reply. The court was bothered by the government’s acknowledgement that it had been aware of the facts which they alleged supported the fraud penalty when it issued the NOD but only filed the motion for leave to amend in response to the taxpayers’ motion for summary judgement regarding penalties.
If you have any questions about this article or any civil or criminal tax matter, please contact me at (214) 749-2456.
