The IRS Can Be Scary. Dropping Out of Your Case Is Even Scarier.

Open letter to Mr. Taxpayer

Mr. Taxpayer, you quit too soon. Perhaps you were worn down by the prison sentence for willful failure to file tax returns or the repeated injunctions against operating a for-profit entity as a charity. Or perhaps you regret naming your corporation “Boobies Rock! Inc.” Whatever it was, good legal advice might have reduced your deficiency and your additions to tax (penalties).

“Mr. Taxpayer” is the alias I have assigned to the petitioner in Shryock v. Commissioner, T.C. Memo. 2026-44. In that case, the Tax Court sustained the IRS’s deficiencies and additions to tax (penalties) against Mr. Taxpayer for fraudulent failure to file and failure to pay. Mr. Taxpayer filed a petition but then stopped participating in his case. The Commissioner made affirmative allegations in his answer, which Mr. Taxpayer ignored, leading to the court deeming the allegations admitted. (Mr. Taxpayer, that was a mistake.)

Based on the deemed admissions, the court accepted as fact that Mr. Taxpayer had formed a for-profit corporation, Boobies Rock! Inc. Through this corporation, Mr. Taxpayer organized fundraisers and hired models to sell merchandise promoting breast-cancer awareness and to collect donations purportedly for breast-cancer research. The models (falsely) told donors that the donations were charitable contributions. The models gave the proceeds to Mr. Taxpayer or deposited them in a bank account he controlled. Mr. Taxpayer also collected funds through Square, Inc.

Several states enjoined Mr. Taxpayer and his entities from engaging in deceptive trade practices. In 2016, he was criminally charged with willfully failing to file individual and corporate income tax returns and pleaded guilty to one count of willfully failing to file his 2011 tax return (the first year in the Tax Court case). He was sentenced to one year in jail.

After facts like these, the IRS is usually next in line. Not surprisingly, the IRS audited Mr. Taxpayer and his entities. Mr. Taxpayer failed to participate. (Mr. Taxpayer, that was a mistake.) The IRS reconstructed Mr. Taxpayer’s income using a bank deposit analysis and prepared substitutes for return under section 6020(b).

Mr. Taxpayer, your case presented some missed opportunities.

• Challenge the IRS’s income reconstruction method. Income reconstruction cases are, by no means, a slam dunk for the IRS. In an income reconstruction case, the IRS computes the taxpayer’s income using an indirect method of proof. Its reliability depends on the facts and has been rejected. See Polizzi v. Commissioner, 265 F.2d 498 (6th Cir. 1959) (rejecting the IRS’s net worth method as not based on proven facts); Thomas v. Commissioner, 223 F.2d 83 (6th Cir. 1955) (rejecting the IRS’s net worth method as guesswork); Aboui v. Commissioner, T.C. Memo. 2024-106, at *7 (finding portions of the IRS’s bank deposit analysis unreliable); Thrower v. Commissioner, T.C. Memo. 2003-139 (reconstruction under the projection method rejected when the starting point was unreliable).
• Challenge the IRS’s conflation of the taxpayer and the taxpayer’s entities and offer evidence of deductions. With income reconstruction, the IRS is expected to consider deductible expenses of which it has knowledge, Metz v. Commissioner, C. Memo. 2022-23, at *11, but the IRS is not required to follow leads suggesting deductible expenses. Chernomordikov v. Commissioner, T.C. Memo. 2025-129.

  In his petition, Mr. Taxpayer alleged that the IRS did not consider certain expenses. The IRS took the position that the expenses were deductible by the corporation and not the owner. Mr. Taxpayer’s bank account was in the name of another entity, Seven Group, LLC (which the IRS treated as a sole proprietorship). Mr. Taxpayer withdrew money from Seven Group, LLC’s account, which the IRS treated as gross receipts, unreduced by expenses. It should be no surprise to hear that the onus is on the taxpayer to substantiate claimed tax deductions. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), instructs us that substantiation does not need to be perfect (unless the expense is subject to the strict substantiation rules in section 274). A taxpayer, however, needs to provide something. If Seven Group, LLC was a business, it had expenses.

• Verify the 6020(b) Certification. Mr. Taxpayer’s petition does not dispute the additions to tax in the deficiency notice. Without the examination file, there is no way of knowing whether the IRS satisfied section 6020(b), which requires substitutes for return to be subscribed and to contain sufficient information to compute the taxpayer’s tax. Also, the form and attachments must purport to be a “return.” See Spurlock v. Commissioner, 120 T.C. 163 (2003). The substitutes for returns were certified (presumably signed) but there is no mention of whether they satisfied the remaining requirements of section 6020(b).
• If there was evidence of an intent to repay distributions, that should have been provided to the IRS and the court. Taxpayer received distributions from Boobies Rock! that the court concluded were paid out of earnings and profits, making them constructive dividends. The court indicated in a footnote citing Magnon v. Commissioner, 73 T.C. 980, 993-995 (1980). that had there been an expectation of repayment, the court would have reached a different conclusion. If the payments were loans from the corporation to Mr. Taxpayer or repayments by the corporation of a loan from Mr. Taxpayer to the corporation, then the payments would be either excluded from income (the former scenario) or mostly excluded from income (the latter scenario). Of course, Mr. Taxpayer would have needed to prove that any such loans constituted genuine indebtedness, BB&T Corp. v. United States of America, 523 F.3d 461, No. 07-1177 (4th Cir. 2008) (slip op. at 20-23), but we will never know because you did not participate in your case.

Mr. Taxpayer, I hope there is not a “next time”, but if there is, get advice. Hire an attorney or, if you can’t afford one, contact a low-income taxpayer clinic or a bar-sponsored program, at least to get a roadmap for your litigation strategy. You gave some freebies to the IRS, most significantly, because you stopped participating in your case.

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If you have issues with the IRS and would like to consult with tax attorneys experienced in tax controversy matters, contact K. Tyson Law.