In Beleiu v. Commissioner, T.C. Memo. 2025-70, the Tax Court sustained civil fraud penalties under Internal Revenue Code (“IRC”) § 6663 against the taxpayer for tax years 2012 through 2014. While the deficiencies themselves were not disputed by the time of trial, the heart of the controversy centered on whether the underpayments stemmed from fraud. This case offers a detailed walkthrough of how the courts evaluate civil fraud penalties in the tax context and highlights the weight of certain circumstantial evidence in sustaining such determinations.
Background and Procedural History
The case arose from joint returns filed by Petitioner and her spouse, covering tax years 2012, 2013, and 2014. One of the Petitioners, Mrs. Beleiu, a financial analyst with a degree and MBA with a concentration in accounting, was responsible for the books and records of two businesses: Remtrix LLC (“Remtrix”) and ITrainX Consulting Group (“ITrainX”). While the income from Remtrix was reported to varying degrees on Schedules C, ITrainX was entirely omitted.
Following an audit initiated in 2016, the Internal Revenue Service (“IRS”) determined substantial unreported income and proposed civil fraud penalties under IRC § 6663.[1] The taxpayer agreed to the income tax deficiencies but disputed the fraud penalties. After an administrative appeal was unsuccessful, the matter proceeded to trial. The Tax Court ultimately held that the IRS had met its burden of proof under the heightened clear and convincing evidence standard applicable to civil fraud penalties.
The Legal Framework for IRC § 6663 Civil Fraud Penalties
IRC § 6663 imposes a penalty equal to 75% of the portion of an underpayment attributable to fraud. To sustain such a penalty, the Commissioner must establish by clear and convincing evidence that: (1) there is an underpayment for the relevant year, and (2) at least some portion of that underpayment was due to fraud. Once fraud is established as to any portion, the entire underpayment is presumed fraudulent unless the taxpayer proves otherwise by a preponderance of the evidence.[2]
Fraud; Generally
Fraud is intentional wrongdoing designed to evade tax believed to be owing.[3] Additionally, the existence of fraud is a fact question, resolved upon consideration of the entire record.[4] Fraud is not to be presumed or based upon a mere suspicion, but because direct proof of a taxpayer’s intent is seldom available, such intent may be established with circumstantial evidence.[5] The Tax Court has held that a “taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.”[6] The taxpayer’s whole course of conduct may be examined to establish the requisite intent, and an intent to mislead may be inferred from a pattern of conduct.[7]
Badges of Fraud in Tax Cases
For the purposes of determining civil fraud, certain circumstances may indicate a fraudulent intent, often referred to as “badges of fraud,” which include, but are not limited to: (1) understating income; (2) keeping inadequate records; (3) giving implausible or inconsistent explanations of behavior; (4) concealing income or assets; (5) failing to cooperate with tax authorities; (6) engaging in illegal activities; (7) supplying incomplete or misleading information to a tax return preparer; (8) providing testimony that lacks credibility; (9) filing false documents (including false tax returns); (10) failing to file tax returns; and (11) dealing in cash.[8]
No single factor is dispositive, but the existence of several factors is “persuasive circumstantial evidence of fraud” and such badges are evaluated considering a taxpayer’s education and sophistication.[9]
Application of Badges of Fraud in Beleiu
The Tax Court methodically applied these factors, concluding that nearly all, save for two, badges of fraud supported the IRS’s determination.
- Substantial Understatement of Income: The discrepancy between reported income and actual bank deposits was staggering. In 2012, Petitioners reported $10,505 in business income but had $208,221 in deposits. In 2013 and 2014, only 12% and 18%, respectively, of gross income was reported. These discrepancies were not minor errors but systemic underreporting over multiple years.
- Inadequate Records: Despite her accounting background, Mrs. Beleui did not maintain organized records. Instead, she prepared returns based on scattered paperwork and incomplete bank statements, failing to produce documentation that would support claimed deductions.
- Implausible or Inconsistent Explanations: Mrs. Beleui’s defense hinged on being distracted due to family obligations and confusing net versus gross income. The Court found this incredible given her professional experience. For example, deductions were taken from amounts already reported as net, resulting in clear double-counting.
- Concealment of Income or Assets: Mrs. Beleui failed to disclose bank accounts and the existence of ITrainX, even to her own representatives. She only acknowledged the second business as “dormant,” though it earned $38,600 in 2013 and $71,250 in 2014.
- Lack of Cooperation with Authorities: Mrs. Beleui failed to produce required records, misrepresented business activity, and initially resubmitted an unchanged Schedule C when asked to amend errors. It was only through IRS summonses that full records were obtained.
- Providing Misleading Information to Representatives: Mrs. Beleui withheld the existence of accounts and ITrainX from the accountants assisting her, obstructing their ability to resolve the audit.
- Non-Credible Testimony: The Court found Mrs. Beleui’s testimony self-contradictory, inconsistent with documentary evidence, and fundamentally lacking credibility.
- Filing False Returns: The returns for all three years were conceded to be materially false.
- Dealing in Cash: Petitioners made large unexplained cash deposits across all years, including over $21,000 into ITrainX’s account in 2014.
The only two neutral factors were that the returns were timely filed and there was no evidence of illegal activity.
Conclusion
The instant case reinforces that civil fraud penalties can be sustained where circumstantial evidence demonstrates a pattern of deception, concealment, and reckless disregard for tax obligations. The Court found that Mrs. Beleui’s advanced education, repeated misrepresentations, and glaring inconsistencies warranted the imposition of § 6663 penalties.
This decision highlights the importance of accurate recordkeeping, full disclosure to tax professionals, and consistency between business income and reported tax items. It also underscores that professional credentials, rather than insulating a taxpayer, may enhance the Court’s expectations.
[1] Supervisory approval is required pursuant to IRC § 6751(b)(1). In the instant case, the parties stipulated that written supervisory approval for the penalties at issue was timely obtained.
[2] See IRC § 6663(b); Hebrank v. Comm’r, 81 T.C. 640, 642 (1983).
[3] Neely v. Comm’r, 116 T.C. 79, 86 (2001).
[4] Estate of Pritchard v. Comm’r, 69 T.C. 391, 400 (1977).
[5] Petzoldt v. Comm’r, 92 T.C. 661, 699 (1989).
[6] Parks v. Comm’r, 94 T.C. 654, 661 (1990).
[7] Stone v. Comm’r, 56 T.C. 213, 24 (1971).
[8] Schiff v. U.S., 919 F.2d 830, 833 (2d Cir. 1990) (per curiam); Bradford v. Comm’r, 796 F.2d 303, 307–08 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Solomon v. Comm’r, 732 F.2d 1459, 1461–62 (6th Cir. 1984), aff’g per curiam T.C. Memo. 1982-603, 44 T.C.M. (CCH) 1410; Parks, 94 T.C. at 664–65; Recklitis v. Comm’r, 91 T.C. 874, 910 (1988); Morse v. Comm’r, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d, 419 F.3d 829 (8th Cir. 2005).
[9] See Niedringhaus v. Comm’r, 99 T.C. 202, 211 (1992) and Clark v. Comm’r, T.C. Memo 2021-114, at 37.
