“Disagreeing with the IRS does not, by itself, equate to fraud.”
In a recent summary opinion, Janangelo v. Commissioner, T.C. Summ. Op. 2026-8, the U.S. Tax Court considered (and imposed) the civil fraud penalty. Mr. Janangelo deducted personal expenses as business expenses (for example, deducting kennel and car wash expenses while he attended tax conferences). Key takeaways are, first, that credibility matters and in the court’s eyes, and Mr. Janangelo had none; and second, the objective assessment of a subjective element (the understanding of a taxpayer) depends, in particular, on the taxpayer’s knowledge and experience. In this case, the taxpayer was an attorney, CPA, and an IRS revenue agent, and the court concluded that his tax reporting was fraudulent. The case provides a springboard to understand big-picture questions about fraud.
What is civil tax fraud?
Fraud is an intentional wrongdoing by a taxpayer with the specific purpose of evading a tax that the individual thinks is owed. The evasion is through concealing, misleading, or otherwise preventing the collection of tax. (Fraud also requires an underpayment of tax, but that rarely, if ever, an issue in a case.) Fraud requires intent to evade taxes. Disagreeing with the IRS does not, by itself, equate to fraud.
How much is a civil tax fraud penalty?
75% of the portion of the underpayment of tax attributable to fraud. I.R.C. § 6663(a).
How does the IRS prove civil fraud?
The IRS cannot presume or impute fraud by a taxpayer. The IRS must prove fraud by clear and convincing evidence. I.R.C. § 7454(a).
“Clear and convincing” is a standard of proof. It is higher than a preponderance of evidence (meaning more than 50%), but not as high as “beyond a reasonable doubt.”
The existence of fraud is based on all facts and circumstances.
How does the IRS prove intent?
The IRS can prove fraud with direct or indirect evidence.
Direct evidence (such as a statement: “I am going to create a second set of books to hide from the IRS all the income I received so I do not have to pay taxes on that”) is rarely available. Note that this lack of availability may change with the prevalence of prompts with AI chats. Unless an exception applies, AI chats are fair game; they can provide very damning evidence of intent.
More commonly, the IRS proves fraud with indirect (also called “circumstantial” evidence) based on a taxpayer’s conduct overall. Determining facts that are relevant is based on factors that potentially show fraud, which the IRS and the courts refer to as “badges” of fraud.
What are factors that show civil fraud (also called “badges” of fraud)?
Badges of fraud include understating income; failing to maintain adequate records; failing to file tax returns; offering implausible or inconsistent explanations of behavior; concealing assets; failing to cooperate with tax authorities; filing false documents; failing to make estimated tax payments; offering false testimony or testimony that lacks credibility; dealing in cash; engaging in illegal activity; and attempting to conceal illegal activity.
The existence of any one badge is not dispositive, but the existence of several badges may be persuasive circumstantial evidence of fraud.
What if the IRS can show only part of the amount I owe is because of civil fraud?
If the IRS establishes that any portion of an underpayment is due to civil fraud, then the entire underpayment is treated as due to fraud. The taxpayer must then establish by a preponderance of the evidence that some portion of the underpayment is not attributable to fraud. I.R.C. § 6663(b).
Is there a defense to a civil fraud penalty?
Fraud does not apply if the IRS cannot show that a taxpayer’s intent was fraudulent.
Fraud does not apply if the IRS cannot show that the taxpayer had an underpayment (a fraud case generally does not proceed if there is no tax underpayment).
Fraud does not apply if the taxpayer can show he had reasonable cause and acted in good faith for the underpayment attributable to fraud.
Is it fraud if I underreport my income?
Underreporting as an isolated incident typically does not show fraud.
A pattern of underreporting can show fraud. The IRS and the courts look at a pattern of repeated understatements over several years as part of the analysis of all the facts and circumstances.
How important is it to the IRS that I maintain records to support the deductions I claim?
The IRS looks at records to substantiate deductions. If your records are poor, the IRS will disallow the deductions for lack of substantiation (meaning you cannot explain through records either what the expense was for or that you paid it). If you have a repeated pattern of poor records used to hide income or expenses or, worse, if you create false records, those facts suggest fraud.
When considering fraud, does the IRS consider my profession or background?
For fraud (and defenses to all penalties, generally), the IRS and the courts consider a taxpayer’s intelligence, education, and tax expertise. For example, “sophisticated” taxpayers, such as very well educated and financially savvy taxpayers are held to a higher standard. Tax professionals, attorneys, certified public accountants (CPAs), and former IRS employees are held to a higher standard of understanding compared to people without those backgrounds.
September 1, 2026. Written by Kim Tyson, J.D., LL.M.