Tax Type
Individual Income Tax
Description
Assessment of penalty
Topic
Penalties and Interest
Date Issued
12-31-1985
- December 31, 1985
Re: §58.1-1821 Application/Individual Income Tax
Dear ****
This will reply to your letter of March 8, 1985, in which you submit an application for relief of penalty assessed to you for taxable year 1979.
FACTS
You filed your 1979 individual income tax return jointly with your wife on April 15, 1980, listing tax due of $ ****** and a refund due to you of $**** Wage and tax statements attached to your return indicated wage income of $****. Subsequently, on December 27, 1982, you filed an amended 1979 income tax return on the face of which you noted that the "the corrections (from the original return) are the result of the reflection of business losses". The "losses" listed on Schedule C, Profit or Loss From Business or Profession, attached to your amended return, totalled $**** in wages allegedly paid by *****. No sales or other income or other business losses were listed on your Schedule C. Similar amended returns were also filed for taxable years 1980 and 1981.
As your 1979 amended return listed no tax owing, a refund of $**** was issued to you. After further review of your amended return, it was discovered that a copy of Federal Form 4188 showing that your amended return had been accepted by the Internal Revenue Service had not been provided. After you were advised to provide the department with such a copy and your failure to do so, the department issued an assessment to recover the tax refunded and added a penalty of 100 percent and interest on the tax and penalty due. As refunds were not issued for your 1980 and 1981 amended returns, no additional liabilities were assessed for those years.
You contest the imposition of penalty, contending that your return was processed in error by the department.
DEFEMINATION
Section 58.1-308 of the Code of Virginia sets forth the provisions for the imposition of penalty and interest in cases where income tax returns are audited and additional tax assessed. The statute provides "if the return was made in good faith and the understatement of the amount in the return was not due to any fault of the taxpayer, there shall be no penalty on the additional tax because of such understatement, but...[i]f the understatement is false or fraudulent with intent to evade the tax, a penalty of 100% shall be added together with interest on the tax."
The term "fraud" means actual intentional wrongdoing with a specific intent to evade a tax believed to be owing. L. F. Ratterman, TC Memo Op. Dkt. 11319 (1948) aff'd. 177 F2d 204 (CA 6th, 1949). In addition, while "isolated errors or discrepancies in records may be insufficient to establish a fraudulent intent to evade tax, where large amounts of income unquestionably received are consistently and repeatedly omitted from tax returns, and where the explanation for such omissions is patently weak or incredible, then the conclusion is inescapable that the taxpayer intended to understate his true income." James P. Hayes, TC Memo (1960-221); George J. Klevenhagen, TC Memo Op. Dkt. 209296 (1950); Ivan B. Reash, TC Memo Op. Dkt. 35691 (1953). Furthermore, "Understatements of income cannot be attributed to mere inadvertence, neglect, or ignorance where the understatements are so large, so regular, and so frequent as to show a deliberate intention to defraud.." Ray Shaban, TC Memo, Op. Dkt. 329O2 (1952).
In this case, you filed amended income tax returns for taxable years 1979, 1980, and 1981 seeking refunds of tax paid previously. On the face of each amended return you noted that changes to your original returns were being made to reflect losses from a business. However, no information can be found by the department to indicate that a business of any type was operated by you in those years. Other than wages, no income or losses of any type were recorded on the Schedule C attached to each return. The name of the firm listed on your return was not listed in the Richmond area telephone directory and was not registered for the various business taxes administered by the department. Further, the name of the firm was not included on the tax rolls of Chesterfield County, even though a business of the type alleged to be carried on would have been required to obtain a county business license. Nor was the name of the firm registered with the State Corporation Commission.
Because the information presently before me indicates that you did not operate a business in 1979 so as to entitle you to claim a loss from a business or profession, I find no basis at this time for relief of the penalty assessed. However, I am willing to reconsider this determination if you can present evidence within the next 60 days that you were engaged in a business during 1979. Such evidence might include the names of clients or customers for whom services were performed, copies (or the originals) of ledgers or other financial records kept, and payroll records to document wages paid. If such information is made available and indicates that you indeed operated a business, the penalty assessed will be relieved. If such is not provided, however, the penalty assessed will be considered correct and payable.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner