Dawn Chapelle Cottman

Opinion

United States Tax Court

T.C. Memo. 2026-88

DAWN CHAPPELLE COTTMAN,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

__________

Docket No. 6978-23. Filed September 17, 2026.

__________

Dawn Chappelle Cottman, pro se.

Victoria E. Cvek, Bradley C. Plovan, and Susan A. Bechtel, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WAY, Judge: At issue in this case is whether petitioner, Dawn C.

Cottman, failed to report income on her Forms 1040, U.S. Individual Income Tax Return, for 2009, 2010, and 2011 (years at issue) and whether petitioner did so fraudulently.

On January 10, 2023, the Internal Revenue Service (respondent or Commissioner) issued a Notice of Deficiency (Notice) determining the following deficiencies and fraud penalties for the years at issue. 1

1 On January 10, 2023, respondent issued a separate Notice of Deficiency for

tax year 2012 but has conceded in full the deficiency and penalty for that year. Tax year 2012 will not be discussed further.

Served 09/17/26

[*2] Penalty Year Deficiency § 6663 2

2009 $124,998 $93,749 2010 265,837 199,378 2011 373,672 280,254

Respondent conceded that the deficiencies and penalties for 2009 and 2010 are lower than the amounts determined in the Notice because of subsequent downward revisions to petitioner’s unreported taxable income for those years. For 2009, after concessions, the amount of unreported taxable income at issue is $142,622 instead of $365,655. For 2010, after concessions, the amount of unreported taxable income at issue is $291,982 instead of $743,711. In the Rule 155 computations to follow, these revisions will affect both the deficiency and penalty calculations for 2009 and 2010. 3

Because the Notice was mailed after the limitations period for assessment under section 6501(a) had run, respondent’s assessments are predicated on proving the applicability of the fraud exception to the period of limitations under section 6501(c)(1).

This Court finds that respondent has met his burden of proving fraud by clear and convincing evidence for the years at issue. Consequently, and for the reasons stated herein, this Court will sustain the deficiencies and fraud penalties, taking into account respondent’s concessions described above.

FINDINGS OF FACT

Some of the facts have been deemed stipulated pursuant to Rule 91(f) and are so found. These facts are incorporated herein by this reference. Other facts are drawn from sworn testimony and evidence

2 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.

3 Respondent also lists seven computational adjustments that flow from

respondent’s determinations of petitioner’s income. The applicability and extent of these adjustments depend on the outcome of this case and are thus relevant to the Rule 155 computations that follow.

3

[*3] admitted at trial. Petitioner resided in Maryland when she timely petitioned this Court. 4

I. Petitioner’s Tax Preparation Business

Petitioner solely owned and operated 40 AM Tax Service (40 AM), a tax return preparation business. Through 40 AM, petitioner prepared and filed approximately 1,219 federal and state income tax returns for clients in exchange for fees during the years at issue. Although petitioner provided these services, she did not have a Preparer Tax Identification Number, nor did she identify herself as a preparer on her clients’ returns.

As part of petitioner’s tax preparation activities, petitioner directed respondent to deposit her clients’ refunds into bank and credit union accounts controlled by petitioner. These included more than two dozen accounts with Navy Federal Credit Union, USAA Federal Savings Bank, and Atlantic Financial Federal Credit Union. Across the various accounts, petitioner was listed either as the individual account holder, trustee, or custodian, or as the business owner of 40 AM.

Petitioner’s primary source of income during the years at issue was 40 AM. Petitioner reported 40 AM’s income and expenses on Schedules C, Profit or Loss From Business, of her Forms 1040. Petitioner did not report as income the client refunds deposited into her accounts, nor did she maintain records of the refunds she alleges she withdrew to distribute to her clients.

II. Petitioner’s Criminal Case

On April 4, 2018, a federal grand jury in the U.S. District Court for the District of Maryland issued a superseding indictment charging petitioner with crimes related to her tax preparation business, specifically with respect to activities undertaken for tax years 2011 and 2012. Petitioner was indicted on one count of conspiracy to defraud the United States under 18 U.S.C. § 286, 5 six counts of filing false claims

4 Absent stipulation to the contrary, this case is thus appealable to the U.S.

Court of Appeals for the Fourth Circuit. See § 7482(b)(1)(A), (2).

5 Count 1 states that petitioner, “from in or about January 2009 until in or

about March 2013,” “added materially false information to the tax returns in order to fraudulently increase the size of the tax refund” and “prepared and filed income tax returns in other people’s names without their knowledge or consent in order to fraudulently obtain a tax refund,” in violation of 18 U.S.C. § 286.

4

[*4] under 18 U.S.C. § 287, three counts of wire fraud under 18 U.S.C. § 1343, three counts of aggravated identity theft under 18 U.S.C. § 1028A(a)(1) and (c)(5), and two counts of filing a false tax return under section 7206(1).

On May 22, 2018, a jury found petitioner guilty on 14 of these counts, including conspiracy to defraud the United States and both counts under section 7206(1). 6 On the basis of the factual allegations set forth in the superseding indictment, the jury found that from about January 2009 until about March 2013:

• Petitioner added materially false information to tax returns in order to increase the size of tax refunds. This information included fictitious income amounts, false work histories, and misrepresentations to support fraudulent claims for the Earned Income Tax Credit and education credits.

• Petitioner prepared and filed tax returns in other people’s names without their knowledge or consent in order to fraudulently claim tax refunds. Petitioner paid various individuals to obtain the birth dates, Social Security numbers, and other private information of these taxpayers.

• Petitioner directed the Internal Revenue Service to deposit the refunds into bank accounts that she controlled. On occasion, petitioner filed Forms 8888, Allocation of Refund, to split refunds with the individuals who provided her with confidential taxpayer information. 7

Petitioner served over three years in prison for these crimes.

6 Petitioner’s related appeals have been unsuccessful. See United States v.

Cottman, No. 21-6946, 2021 WL 4860716 (4th Cir. Oct. 19, 2021); United States v. Cottman, No. 22-7241, 2023 WL 334667 (4th Cir. Jan. 20, 2023).

7 This Court will treat these findings as established facts. See United States v.

Podell, 572 F.2d 31, 35 (2d Cir. 1978) (“It is well-settled that a criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case.”); see also United States v. Uzzell, 648 F. Supp. 1362, 1365 (D.D.C. 1986) (clarifying that, where “nothing in the record indicates that anything less than all of the specific acts alleged in the count were determined by the jury in reaching [the] verdict,” the guilty verdict conclusively establishes each specific act charged in that count).

5

[*5] III. Petitioner’s Postconviction Civil Examination

Petitioner timely filed her Forms 1040 for tax years 2009, 2010, and 2011. 8 In 2012 respondent conducted an examination of petitioner’s Forms 1040. Around that time petitioner signed a consent form giving respondent until 2014 to examine her 2009 and 2010 tax returns. No extension was provided for 2011. Respondent issued no Notice of Deficiency at this time.

In October 2020 petitioner’s case was assigned to Revenue Agent (RA) Samuel Herr for a postconviction civil examination for the years at issue. Because of grand jury secrecy rules related to petitioner’s criminal trial, RA Herr had access to some but not all of petitioner’s bank records for tax years 2009 and 2010. RA Herr had no access to petitioner’s bank records for tax year 2011.

RA Herr performed bank deposits analyses (BDA) for tax years 2009 and 2010. As part of these analyses, RA Herr compared petitioner’s bank records against the gross receipts reported on her Schedules C to determine whether petitioner’s reported income was substantially correct.

First, RA Herr identified taxable and nontaxable deposits.

Nontaxable deposits included transfers between accounts, redeposits, and petitioner’s own tax refunds. Next, RA Herr subtracted gross receipts from total taxable deposits to arrive at unreported income. Finally, RA Herr subtracted withdrawals attributable to expenses, provided they were supported by adequate substantiation. Absent substantiation, withdrawals were disregarded.

RA Herr did not initially perform a BDA for tax year 2011 because petitioner’s bank records were unavailable. Instead, he relied on the Government’s representations in petitioner’s criminal trial, with the intention of later verifying those figures once petitioner’s bank records became available.

During the examination, RA Herr contacted petitioner to discuss his findings and to request documentation. Petitioner, who was incarcerated at the time, was unable to provide any additional

8 On April 3, 2012, the Internal Revenue Service processed an amended income

tax return filed by petitioner for tax year 2011.

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[*6] documentation. Because petitioner provided no substantiation, RA Herr did not treat any of the withdrawals as business expenses.

On February 7, 2022, RA Herr completed a Civil Penalty Approval Form. The primary penalty position for the years at issue was for civil fraud under section 6663. On February 8, 2022, Supervisory Internal Revenue Agent Tammy Finch signed it.

On January 10, 2023, respondent issued petitioner the Notice, and on April 10, 2023, petitioner timely filed her Petition. 9

On July 13, 2023, petitioner filed for bankruptcy under 11 U.S.C.

chapter 7 with the U.S. Bankruptcy Court for the District of Maryland. On October 20, 2023, the bankruptcy court granted petitioner a discharge and closed her case.

Once additional bank records became available for tax years 2009 and 2010, RA Herr revised his initial BDAs. He adjusted petitioner’s unreported taxable income downward from $365,655 to $142,622 for tax year 2009 and from $743,711 to $291,982 for tax year 2010.

Shortly before trial, around February or March 2025, RA Herr obtained bank records for tax year 2011 from the Department of Justice. Upon receipt, RA Herr performed a BDA, which resulted in an upward revision to petitioner’s unreported taxable income from $1,035,559 to $1,165,007. Respondent, however, chose not to move for an increased deficiency.

Several months before trial, respondent contacted petitioner, inviting her to review the BDAs and to provide supporting documentation. Petitioner did not respond to respondent’s followup calls. Petitioner also received, but chose not to open, exhibits from respondent containing bank records for petitioner’s review.

A trial was held before this Court in Baltimore, Maryland, on April 15, 2025.

9 The Court’s records indicate that the Petition was filed on April 17, 2023.

However, the Petition was postmarked April 10, 2023. Thus, under the “timely mailed, timely filed” rule of section 7502, the Petition is deemed filed on April 10, 2023.

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[*7] OPINION

I. Jurisdiction and Standard of Review

This Court has jurisdiction to resolve this case under section 6213(a). In general, the Commissioner’s determinations set forth in a Notice of Deficiency are presumed correct, and the taxpayer bears the burden of proving them erroneous. See Welch v. Helvering, 290 U.S. 111, 115 (1933). Three exceptions to this presumption are pertinent here.

First, in cases of unreported income, the Commissioner must make a minimal evidentiary showing to support a link between a taxpayer and an income-producing activity. See Walquist v. Commissioner, 152 T.C. 61, 67 (2019). Once the Commissioner has made that showing, the burden shifts to the taxpayer to prove by a preponderance of the evidence that the Commissioner’s determinations are arbitrary or erroneous. Id. at 67–68.

Second, under section 7491(c), the Commissioner bears the burden of production with respect to a taxpayer’s liability for penalties or additions to tax. The Commissioner must provide sufficient evidence that the imposition of penalties is appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). This burden includes producing evidence that the initial determination of the penalty was approved in writing by the immediate supervisor of the individual making the determination. See § 6751(b)(1).

Third, the Commissioner bears the burden of proving fraud by clear and convincing evidence. See § 7454(a); Rule 142(b). Specifically, the Commissioner bears the burden of proving that for each year at issue (1) an underpayment of tax exists and (2) some portion of the underpayment is attributable to fraud. See Cantrell v. Commissioner, T.C. Memo. 2017-170, at *9.

Section 6663(a) imposes a 75% civil penalty on any portion of an underpayment of tax required to be shown on a return that is attributable to fraud. If any part of an underpayment is attributable to fraud, the entire underpayment is treated as attributable to fraud, unless the taxpayer proves otherwise. See § 6663(b).

Because the Notice was mailed outside of the ordinary three-year limitations period prescribed by section 6501(a), to sustain the deficiencies this Court must determine whether the fraud exception under section 6501(c)(1) applies. If it does, the limitations period falls

8

[*8] away, and the tax may be assessed at any time. See § 6501(c). The Commissioner’s burden of proof under section 6501(c)(1) is the same as that imposed by section 6663(a). See Bell Cap. Mgmt., Inc. v. Commissioner, T.C. Memo. 2021-74, at *14.

II. Analysis

A. Burden of Production

Respondent has met his evidentiary burden with respect to unreported income. Respondent produced RA Herr’s BDAs for the years at issue as well as corresponding bank records. See Estate of Dickerson v. Commissioner, T.C. Memo. 1997-165, 73 T.C.M. (CCH) 2506, 2511 (1997). 10 Furthermore, petitioner does not dispute receiving the unreported income. Rather, she contends that the income did not belong to her and that she held the funds for later distribution to her clients.

Respondent has also met his burden of production with respect to the managerial approval of the civil fraud penalties. The Fourth Circuit, to which this case is appealable, has not squarely addressed when supervisory approval must be obtained. See Goodwill-Oikerhe v. Commissioner, T.C. Memo. 2026-18, at *33 n.14. Therefore, we follow the precedent of this Court. See Frost v. Commissioner, 154 T.C. 23, 32 (2020) (stating that supervisory approval must be secured “before the first formal communication to the taxpayer of penalties”); Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). 11 On February 7, 2022, RA Herr completed the Civil Penalty Approval Form, and on February 8, 2022, his supervisor, Ms. Finch, signed it. On January 10, 2023, respondent issued the Notice. Penalty approval was thus timely secured.

B. Burden of Persuasion

Fraud is an intentional wrongdoing by a taxpayer with the specific purpose of evading tax owed. See Gottesman v. Commissioner, T.C. Memo. 2025-94, at *9. Fraud is a question of fact to be resolved by

10 In addition, on April 30, 2025, the Court made absolute its Order to Show

Cause Why Proposed Facts and Evidence Should Not be Accepted as Established Pursuant to Rule 91(f), thereby deeming stipulated respondent’s proposed Stipulation of Facts, including the bank deposit information contained therein.

11 In addition, Treasury Regulation § 301.6751(b)-1(c), which is effective for all

penalties assessed on or after December 23, 2024, id. para. (f), states that penalties subject to pre-assessment review must be approved in writing “on or before the date the notice is mailed.” Under either authority, supervisory approval was timely.

9

[*9] consideration of the entire record. See Midwest Med. Aesthetics Ctr. v. Commissioner, T.C. Memo. 2024-32, at *46. Fraud is never presumed and must be established by independent evidence of a taxpayer’s fraudulent intent. See id. Because direct evidence of fraud is seldom available, evidence of fraud may be shown by circumstantial evidence. See id.

In determining whether fraud exists, courts look to several indicia, or “badges,” of fraud. No single factor is dispositive, but the existence of several factors “is persuasive circumstantial evidence of fraud.” See Vanover v. Commissioner, T.C. Memo. 2012-79, 103 T.C.M. (CCH) 1418, 1420–21. These factors include (1) understating income, (2) failing to maintain adequate records, (3) offering implausible or inconsistent explanations, (4) concealing income or assets, (5) failing to cooperate with tax authorities, (6) engaging in illegal activities, (7) providing incomplete or misleading information, (8) offering false or incredible testimony, (9) filing false documents, including filing false income tax returns, (10) failing to file tax returns, and (11) engaging in extensive dealings in cash. See Gottesman, T.C. Memo. 2025-94, at *10.

This Court will first consider whether petitioner’s prior criminal fraud conviction estops her from disputing fraud in this case. To the extent the doctrine of collateral estoppel does not apply, this Court will consider whether there exist sufficient badges of fraud to sustain respondent’s position.

1. Collateral Estoppel

Where a different court has already adjudicated a particular issue, the doctrine of collateral estoppel can be used to prevent the relitigation of identical issues, thereby conserving judicial resources. See Balint v. Commissioner, T.C. Memo. 2023-118, at *9.

For collateral estoppel to apply, the following conditions are required: (1) the issue in the second action is identical in all respects to the one decided in the first; (2) there was a final judgment rendered by a court of competent jurisdiction on that issue; (3) the party against whom collateral estoppel is invoked was a party (or privy to a party) to the prior action; (4) the relevant issue was actually litigated and the resolution of the issue was essential to the prior judgment; and (5) the controlling facts and applicable legal rules remain unchanged from those in the prior action. See Breland v. Commissioner, 152 T.C. 156,

10

[*10] 161 (2019), aff’d per curiam, No. 23-12345, 2024 WL 2796450 (11th Cir. May 31, 2024).

Courts have broad discretion to determine the appropriate application of collateral estoppel. See Senyszyn v. Commissioner, T.C. Memo. 2013-274, at *8–9. A court may be reluctant to apply collateral estoppel where it is used offensively against a party who had little incentive to defend in the first action or is afforded procedural opportunities in the second action that were not available in the first. See id.; see also Parklane Hosiery Co. v. Shore, 439 U.S. 322, 330–31 (1979). Neither of these factors is present here.

a. Underpayment of Tax

Respondent argues that petitioner is estopped from disputing an underpayment for tax year 2011 because petitioner was convicted under section 7206(1) of filing a false tax return for that year. Section 7206(1) prohibits a person from “[w]illfully mak[ing] and subscrib[ing] any return, statement, or other document . . . which he does not believe to be true and correct as to every material matter.” A conviction under section 7206(1) does not, per se, preclude a taxpayer from contesting the existence of an underpayment. Here, however, the two counts of conviction under section 7206(1) specifically state that petitioner reported amounts on her 2011 tax returns that were “substantially different from the correct amounts.” This statement necessarily implies that petitioner underreported income.

Furthermore, petitioner has not claimed that the underreporting of income did not produce an underpayment. See Miller v. Commissioner, T.C. Memo. 1989-461, 57 T.C.M. (CCH) 1419, 1431–32. Therefore, this Court finds that petitioner is estopped from disputing an underpayment for tax year 2011.

Respondent contends that petitioner’s conviction under section 7206(1) for tax year 2011 is persuasive evidence of an underpayment for tax years 2009 and 2010 because “petitioner’s activities resulting in her underpayment of income were the same in 2009 and 2010.”

Count 1 states that petitioner, “from in or about January 2009 until in or about March 2013,” “added materially false information to the tax returns in order to fraudulently increase the size of the tax refund” and “prepared and filed income tax returns in other people’s names without their knowledge or consent in order to fraudulently obtain a tax refund,” in violation of 18 U.S.C. § 286. This Court agrees

11

[*11] with respondent that these findings are persuasive evidence of underpayments for the three tax years at issue.

Furthermore, respondent’s BDAs, which found that gross receipts were underreported for the three tax years at issue, constitute clear and convincing evidence of underpayments. See Ballard v. Commissioner, T.C. Memo. 2017-57, at *9–10 (finding that the Commissioner’s BDAs established underpayments for the years at issue); see also Di Giorgio v. Commissioner, T.C. Memo. 2023-44, at *16.

b. Intent to Defraud

Respondent concedes that petitioner is not estopped by her conviction under section 7206(1) from contesting the issue of fraudulent intent since the intent to evade tax is not a requisite element of that provision. 12 Caselaw supports this position. See, e.g., Considine v. United States, 683 F.2d 1285, 1287 (9th Cir. 1982) (“Section 7206(1) (false return), however, does not require any fraudulent intent.”); see also Wright v. Commissioner, 84 T.C. 636, 641–42 (1985) (“[T]he Supreme Court held that, for purposes of sections 7201–7207, ‘willfully’ ‘simply means a voluntary, intentional violation of a known legal duty.’ . . . This definition says nothing about fraud, and requires nothing more than a specific intention to violate the law.” (quoting United States v. Pomponio, 429 U.S. 10, 12 (1976))). Nevertheless, a conviction for willful falsification under section 7206(1) will be one of the factors considered by a court in its independent fraud analysis. See Wright, 84 T.C. at 643– 44.

2. Badges of Fraud

Given that collateral estoppel does not apply to every element of this case, this Court will proceed with an independent fraud analysis to determine whether there is sufficient circumstantial evidence to prove that petitioner acted with the intent to evade tax.

12 Petitioner’s conviction under 18 U.S.C. § 286 could possibly serve to estop

petitioner from disputing fraudulent intent because petitioner’s conviction under that provision includes specific findings that petitioner intended to evade tax. However, this Court has not had occasion to consider the preclusive effects of a conviction under 18 U.S.C. § 286, and neither party has addressed the issue. Consequently, this Court will not consider the preclusive effects here. See Monahan v. Commissioner, 109 T.C. 235, 251 (1997) (“Sua sponte consideration of issue preclusion generally should be limited to circumstances where the parties are given an opportunity to address the applicability of the doctrine to a particular issue.”).

12

[*12] a. Underreporting Income

A pattern of substantially underreporting income over several successive years can be persuasive evidence of fraudulent intent, even where the usual indicia of fraud are absent. See Hoyal v. Commissioner, T.C. Memo. 2024-84, at *19. Specifically, it has been held that discrepancies of 100% or more between a taxpayer’s actual and reported net income for three successive years provide strong evidence of fraudulent intent. See Cooley v. Commissioner, T.C. Memo. 2004-49, 87 T.C.M. (CCH) 1025, 1032.

For the years at issue petitioner reported gross receipts of $11,550, $114,575, and $151,200, respectively. After concessions, respondent determined that petitioner’s unreported gross receipts were $142,622, $291,982, and $1,035,559, respectively. These reflect discrepancies of 1,235%, 255%, and 685%, respectively. 13

This factor weighs in favor of finding fraud.

b. Keeping Inadequate Records

Taxpayers are required to maintain sufficient records for the Commissioner to determine their correct tax liabilities. See § 6001. Failure to maintain records is an indicium of fraud. See Scott v. Commissioner, T.C. Memo. 2012-65, 103 T.C.M. (CCH) 1310, 1317.

Respondent contends that petitioner’s failure to provide documentation to substantiate income is evidence of a failure to maintain adequate records. This Court has previously found that the failure to produce adequate books and records, in the light of the facts and circumstances, permits an inference that such records either do not exist or are unfavorable to the taxpayer. See Di Giorgio, T.C. Memo. 2023-44, at *25; see also Scott, 103 T.C.M. (CCH) at 1317.

RA Herr had to resort to BDAs because petitioner failed to produce adequate books and records. Petitioner was afforded the

13 To determine the percentage discrepancy, we take the excess of actual

income over reported income and divide that amount by reported income. See Cooley, 87 T.C.M. (CCH) at 1032 n.6. Respondent in his brief incorrectly substituted total gross receipts for unreported gross receipts in concluding that “petitioner had unreported Schedule C gross receipts in the amounts of $154,171.74, $406,556.81, and $1,316,207.00, respectively.”

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[*13] opportunity to review her bank statements and substantiate any nontaxable deposits, but petitioner did not cooperate.

Petitioner claims she was unable to provide her records because they were confiscated by respondent in 2013. Petitioner provides no evidence to support this claim. More importantly, petitioner acknowledged during trial that she failed to keep records of the cash withdrawals she alleges were business expenses. For these reasons, this Court finds that petitioner did not maintain adequate records.

This factor weighs in favor of finding fraud.

c. Implausible or Inconsistent Explanations of Behavior

A taxpayer’s implausible or inconsistent explanations of conduct, through testimony or court filings, may be evidence of fraudulent intent. See Di Giorgio, T.C. Memo. 2023-44, at *25. Although this Court finds that certain aspects of petitioner’s story lack credibility, there have been no major inconsistencies in petitioner’s legal arguments or factual allegations.

This factor weighs against finding fraud.

d. Concealment of Income or Assets

A taxpayer’s concealment of sources of income or ownership of assets supports a finding of fraud. See id. at *26. Petitioner was convicted of filing fraudulent tax returns to obtain substantial refunds and then directing respondent to deposit the refunds into various accounts among the more than two dozen she maintained at different financial institutions. Petitioner omitted that income from her tax returns without substantiation adequate to support a legitimate reason for doing so.

This factor weighs in favor of finding fraud.

e. Failing to Cooperate with Tax Authorities

A taxpayer’s failure to cooperate with tax authorities, including with revenue agents during an examination, can indicate fraudulent intent. See id.

14

[*14] Respondent asserts that petitioner failed to cooperate with RA Herr or counsel. The reality is not so straightforward. RA Herr notified petitioner of the examination while petitioner was still incarcerated. This Court is doubtful that petitioner could have participated in the examination in a meaningful way from prison. Petitioner spoke with RA Herr over the phone shortly after her release, and there is no evidence in the record of further communication from respondent until the issuance of the January 2023 Notice.

That said, in the months leading up to trial, respondent invited petitioner to review RA Herr’s BDAs and to discuss her income. Respondent contacted petitioner numerous times thereafter, but petitioner did not respond.

This factor is neutral with respect to a finding of fraud.

f. Engaging in Illegal Activities

Engaging in illegal activities, even if the taxpayer is not charged with a crime, is circumstantial evidence of fraud. See id. at *27; see also Meier v. Commissioner, 91 T.C. 273, 302–03 (1988). Convictions for crimes involving perjury, deceit, breach of fiduciary duty, and concealment of criminal proceeds are highly probative of an intent to evade tax. See Cantrell, T.C. Memo. 2017-170, at *12.

Petitioner was convicted of conspiracy to defraud the United States, as well as offenses for filing false claims and tax returns, wire fraud, and aggravated identity theft. Each of these offenses involves deceit and concealment. In addition, petitioner submitted fraudulent refund claims on behalf of her clients and individuals whose private information she misappropriated. See Morse v. Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 676 (noting that convictions for filing false tax returns are highly persuasive evidence of intent to evade taxes), aff’d, 419 F.3d 829 (8th Cir. 2005).

This factor weighs in favor of finding fraud.

g. Intent to Mislead

A pattern of conduct that evidences an intent to mislead is probative of fraudulent intent. See Sanchez v. Commissioner, T.C. Memo. 2014-174, at *21–22, aff’d, 671 F. App’x 571 (9th Cir. 2016). Petitioner was convicted of orchestrating a multiyear scheme to trick respondent into issuing fraudulent refunds. As part of this scheme,

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[*15] petitioner supplied fictitious income amounts, false work histories, and misrepresentations to support fraudulent claims for the Earned Income Tax Credit and education credits.

This factor weighs in favor of finding fraud.

h. Credibility of Testimony

The primary thrust of petitioner’s testimony at trial related to RA Herr’s BDAs. Petitioner testified that although her business and personal funds were commingled in the bank accounts that she controlled, many of the withdrawals from those accounts were used to reimburse her clients.

This Court found petitioner’s testimony about the withdrawals from her bank accounts to be credible in some respects; there were likely at least some legitimate business expenses paid from commingled funds. That said, no such inference can be extended to the refunds pertaining to individuals whose taxpayer information petitioner unlawfully obtained. Moreover, petitioner failed to provide any documentation or even specific testimony that could be used to quantify these business expenses. Thus, even though petitioner’s testimony was credible in some respects, it was not inconsistent with respondent’s positions or with the BDAs.

This factor is neutral with respect to a finding of fraud.

i. Filing False Documents

Filing false documents indicates a taxpayer’s intent to evade tax.

See Hoyal, T.C. Memo. 2024-84, at *22–23. A taxpayer’s filing of a tax return that omits income constitutes the filing of a false document. Such a filing, alone, however, is not sufficient to satisfy this badge. See id. During the years at issue, petitioner not only filed personal tax returns that omitted income, but she also added materially false information to the tax returns of her clients and others in order to obtain fraudulent refunds.

This factor weighs in favor of finding fraud.

j. Failing to File Tax Returns

Petitioner filed a tax return for each of the years at issue.

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[*16] This factor weighs against finding fraud.

k. Dealing in Cash

Dealing in large amounts of cash without maintaining any records is often indicative of intentional underreporting of income. See Robleto v. Commissioner, T.C. Memo. 2008-195, 96 T.C.M. (CCH) 94, 101, aff’d, 471 F. App’x 576 (9th Cir. 2012). At trial, petitioner testified that she withdrew client refunds from her accounts in cash and distributed them, yet petitioner maintained no records of these transactions.

This factor weighs in favor of finding fraud.

3. Burden of Persuasion: Conclusion

To summarize, this Court finds that petitioner is estopped from disputing an underpayment for tax year 2011 and that respondent has established by clear and convincing evidence that an underpayment existed for tax years 2009 and 2010.

Although petitioner is not estopped from disputing fraudulent intent, respondent has presented sufficient circumstantial evidence to establish by clear and convincing evidence that the underpayments for each year at issue are attributable to fraud. This Court’s badges of fraud analysis identifies seven factors that weigh in favor of finding fraud, two that weigh against, and two that are neutral. Weighing these factors, this Court concludes that respondent has met his burden of proof with respect to fraud.

Because respondent has proven fraud for the years at issue, the limitations period has not expired, and the taxes at issue may still be assessed. See § 6501(c).

C. Other Issues

1. Bank Deposits Analysis

Petitioner disputes the methodology by which RA Herr conducted the BDAs. In petitioner’s view, RA Herr erred by including in her taxable income refunds deposited by respondent into petitioner’s accounts. Petitioner testified that the refunds belonged to her clients, and she later distributed them.

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[*17] RA Herr testified that he treated all deposits as taxable income unless they were readily identifiable as nontaxable—such as transfers between accounts, redeposits, or personal tax refunds—or the taxpayer provides evidence that they are nontaxable. Absent substantiation, RA Herr did not assume that any withdrawals were business expenses.

RA Herr is correct that he is not obligated to treat a withdrawal as a business expense if the taxpayer fails to provide adequate substantiation. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) (noting that “an income tax deduction is a matter of legislative grace” and “the burden of clearly showing the right to the claimed deduction is on the taxpayer” (quoting Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943))).

RA Herr is also correct that he is permitted to include deposits in taxable income even if those deposits are followed by withdrawals. The RA does not bear the burden of identifying all nontaxable deposits; that responsibility lies with petitioner. See Ninke v. Commissioner, T.C. Memo. 2023-88, at *12 (explaining that the taxpayer’s “burden is to identify additional cash deposits from excludable sources” and it is “well settled that we need not accept a taxpayer’s self-serving testimony when the taxpayer fails to present credible, corroborative documentary evidence”).

Given that petitioner did not provide RA Herr with any evidence that the refund deposits were in fact business expenses, RA Herr did not err in including the refunds in petitioner’s taxable income.

2. Bankruptcy Filing

Finally, petitioner argues that her discharge in bankruptcy in October 2023 relieves her of liability in this case. Petitioner is mistaken.

Federal bankruptcy law excepts from discharge any debt for a tax “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” 11 U.S.C. § 523(a)(1)(C). Nonbankruptcy courts may exercise jurisdiction to determine the applicability of the exceptions to discharge set forth in 11 U.S.C. § 523(a) (other than the exceptions provided in subsection (a)(2), (4), and (6)). See Bussell v. Commissioner, 130 T.C. 222, 237–38 (2008).

Because this Court has found that petitioner acted with the intent to evade tax for the years at issue, petitioner’s tax liabilities are excepted from discharge.

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[*18] III. Conclusion

This Court finds that respondent has established, by clear and convincing evidence, that petitioner underreported income during the years at issue and that the underpayments were attributable to fraud. Thus, the years at issue remain open, and this Court will sustain the deficiencies and penalties to the extent not conceded by respondent. All other contentions raised by the parties—to the extent not discussed— are found to be irrelevant, moot, or without merit.

To reflect the foregoing,

Decision will be entered under Rule 155.