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The Hidden Dangers of Filing a Tax Court Petition, Part III

By Joel N. Crouch on December 19, 2022
I’ve previously written two blog posts regarding the “hidden” dangers of filing a Tax Court petition, HERE and HERE . In both blog posts, I discussed taxpayers who received Notices of Deficiency, filed Tax Court petitions and were surprised by the IRS answer, wherein the IRS increased the stakes by proposing a 75% fraud penalty for the first time. As I said at the end of the second blog post:

“The lesson from Wegbreit and Buckelew is that an IRS Notice of Deficiency does not foreclose the IRS from raising new issues in a Tax Court case. Filing a petition in the Tax Court allows the IRS an opportunity to propose new substantive issues involving tax or penalties. If the IRS does so, it will bear the burden of proof on those issues; however, the IRS has the burden of proving civil fraud whether it is initially proposed in the Notice of Deficiency or raised in a subsequent answer.”

While I’m not sure “hidden danger” is still correct, the Tax Court addressed a similar issue in a decision on November 30th in Showalter v. Commissioner. In Showalter, the taxpayer had unfiled tax returns and the IRS prepared Substitutes For Return (SFR) and sent Mr. Showalter a Notice of Deficiency. After Mr. Showalter filed a Tax Court petition, he worked with IRS Chief Counsel to determine his correct tax liability. An analysis of Mr. Showalter’s bank records uncovered over $100,000 of additional income that was not included on the IRS-prepared SFRs. Soon thereafter, the Tax Court granted the IRS Motion for Partial Summary Judgment that Mr. Showalter had the additional income uncovered by the analysis of the bank records.

For anyone interested in a more detailed discussion of SFR procedures, etc. I recommend reading Keith Fogg’s discussion of Showalter v. Commissioner on the Procedurally Taxing blog, HERE.

For questions on this or any other tax-related matters, please feel free to contact me at (214) 749-2456 or jcrouch@meadowscollier.com.