Court Finds Taxpayer Submitted Digitally Altered False Documents, Sustained the Fraud Penalty the IRS Proposed
This Tax Court case, Ishveen K. Chopra v. Commissioner, T.C. Memo. 2025-2, serves as a stark reminder of the consequences of not only failing to properly substantiate deductions, but also engaging in outright fraud. The Court upheld the IRS’s determination of a $30,520 deficiency and a civil fraud penalty of $22,890. This case provides valuable insights into the standards of proof and the “badges of fraud” that tax professionals should be aware of.
Factual Background
Ishveen K. Chopra, a healthcare consultant with advanced degrees, filed her 2019 tax return, reporting $188,015 in wages from her W-2 employment. She also claimed significant losses from a supposed consulting activity on Schedule C, and from her participation in a partnership, Manticore Consultancy, on Schedule E. She claimed a total of $89,828 in business expenses, and itemized deductions including $68,977 in medical expenses and $27,200 in state taxes. After applying limitations, she claimed a $61,924 medical expense deduction and a $10,000 state tax deduction. Her return showed a total tax liability of $2,461 and a claimed refund of $27,849.
The IRS selected Chopra’s return for examination and Revenue Agent (RA) Gary Libbin requested substantiation for the deductions. Chopra provided credit card statements for five nonconsecutive months, which showed inconsistencies. She also submitted various documents, including hotel receipts and invoices that appeared altered or suspicious, for example, hotel receipts that misspelled the hotel’s name and had extremely late checkout times (one after 11:00 pm). Invoices for legal services from the Chen Law Firm were disavowed by the firm when contacted by the IRS. A purported invoice from United Healthcare for a $68,977 medical bill was also found to be fraudulent, as Johns Hopkins Hospital had no record of her treatment.
Chopra was uncooperative during the examination, failing to provide additional documents when requested and not responding to IRS attempts at communication. She also refused to provide tax returns or documents related to Manticore. The Tax Court ordered her to produce these records. Chopra responded that additional financial records were irrelevant and that the Manticore tax return was “confidential”. The court overruled these objections and stated that she would be precluded from introducing at trial any documents that she should have provided to the IRS, and that negative inferences could be drawn from the lack of cooperation.
Legal Analysis and Application
The Tax Court’s decision hinged on several key legal principles:
Burden of Proof: The court reiterated that the Commissioner’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. This is a foundational concept in tax litigation. The taxpayer bears the burden of proving their entitlement to any claimed deductions. The court cited INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992), to support this point. The court also noted that the burden of proof may shift to the Commissioner on a factual issue if the taxpayer introduces credible evidence and has maintained all required records, citing § 7491(a). However, Chopra did not meet the requirements of § 7491(a).
Substantiation Requirements: The court emphasized the importance of substantiating deductions. Taxpayers must keep books and records that substantiate the expenses underlying the deductions. Failure to keep and present such records counts heavily against a taxpayer’s proof. The court cited § 6001 and Roberts v. Commissioner, 62 T.C. 834, 836 (1974) to support this. For certain expenses, like travel and listed property, the court pointed out that heightened substantiation requirements under § 274(d) apply. The court cited Temp. Treas. Reg. § 1.274-5T(c) which specifies that no deduction is allowed unless the taxpayer substantiates by adequate records or sufficient evidence, the amount, time, place, and business purpose of the expense. The court noted that for expenses governed by § 274(d), written evidence has greater probative value than oral evidence.
Business Expenses: The Court cited section 162(a), which allows a deduction for ordinary and necessary expenses incurred in carrying on a trade or business. The Court noted that for an expenditure to be necessary, it has to be connected to and helpful to the taxpayer’s business. The Court also cited Treasury Regulation § 1.162-1(a) and Welch v. Helvering, 290 U.S. 111, 113 (1933), to support this. The Court disallowed Chopra’s claimed business expense deductions on her Schedule C because the expenses were allegedly incurred on behalf of Manticore. The court pointed out that partners cannot deduct partnership expenses on their individual returns unless the partnership agreement specifically requires the partner to pay them out of pocket. The court cited Cropland Chem. Corp. v. Commissioner, 75 T.C. 288, 295 (1980), aff’d, 665 F.2d 1050 (7th Cir. 1981) (unpublished table decision), and Klein v. Commissioner, 25 T.C. 1045, 1051–52 (1956), to support this principle.
Fraud Penalty: The court reviewed the elements needed to impose a civil fraud penalty under § 6663(a). The IRS must prove by clear and convincing evidence that there was an underpayment of tax and that at least some portion of it was due to fraud. The court cited § 7454(a), Rule 142(b), and Richardson v. Commissioner, T.C. Memo. 2006-69, 91 T.C.M. (CCH) 981, 996, aff’d, 509 F.3d 736 (6th Cir. 2007), to support this. The court cited Hebrank v. Commissioner, 81 T.C. 640, 642 (1983), to support the fact that if the Commissioner proves that any part of an underpayment is due to fraud, the entire underpayment is treated as attributable to fraud unless the taxpayer proves otherwise by a preponderance of the evidence. The court defined fraud as intentional wrongdoing designed to evade taxes. The court cited Neely v. Commissioner, 116 T.C. 79, 86 (2001), for that definition. Because direct proof of a taxpayer’s intent is rarely available, fraudulent intent may be established by circumstantial evidence. The court cited Petzoldt v. Commissioner, 92 T.C. 661, 699–700 (1989), to support this. The court then explained how the Commissioner must show that the taxpayer intended to evade taxes by conduct intended to conceal, mislead, or prevent the collection of taxes. The court cited Parks v. Commissioner, 94 T.C. 654, 661 (1990) to support that point.
Badges of Fraud: The court detailed various “badges of fraud”. The court cited Schiff v. United States, 919 F.2d 830, 833 (2d Cir. 1990) (per curiam); Bradford v. Commissioner, 796 F.2d 303, 307–08 (9th Cir. 1986), aff’g T.C. Memo. 1984-601; Parks, 94 T.C. at 664–65; Recklitis v. Commissioner, 91 T.C. 874, 910 (1988); and Morse v. Commissioner, T.C. Memo. 2003-332, 86 T.C.M. (CCH) 673, 675, aff’d, 419 F.3d 829 (8th Cir. 2005) in support of this discussion. The court found that Chopra displayed multiple badges of fraud including understating income, keeping inadequate records, giving implausible and inconsistent explanations, failing to cooperate with tax authorities, lack of credibility, and filing false documents. The Court pointed out that understating income can be done by overstating deductions, citing Gould v. Commissioner, 139 T.C. 418, 446–47 (2012), aff’d, 552 F. App’x 250 (4th Cir. 2014); and Estate of Temple v. Commissioner, 67 T.C. 143, 161 (1976). The court noted that failing to supply adequate records and falsifying documents is evidence of intent to conceal information from the IRS. The court cited Meier v. Commissioner, 91 T.C. 273, 302 (1988).
Supervisory Approval: The Court also discussed the requirement of § 6751(b)(1) that any penalty be personally approved in writing by the immediate supervisor of the individual making such a determination. The court cited Baxter v. Commissioner, 910 F.3d 150, 169 n.3 (4th Cir. 2018), aff’g T.C. Memo. 2017-150, to support this. The court stated that the IRS has to show compliance with § 6751(b)(1), and cited Chai v. Commissioner, 851 F.3d 190, 221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42, for that point. The court also cited Belair Woods, LLC v. Commissioner, 154 T.C. 1, 14–15 (2020), which stated that an initial penalty determination is typically embodied in a letter by which the IRS formally notifies the taxpayer of the penalty. The court further cited Frost v. Commissioner, 154 T.C. 23, 35 (2020) to state that once the Commissioner shows written supervisory approval, the burden shifts to the taxpayer to show the approval was untimely. The court found that the IRS met its burden by presenting the Civil Penalty Approval Form signed by RA Libbin’s supervisor, and that this occurred before the notice of deficiency was issued to Chopra.
Key Takeaways for Tax Professionals
Documentation is Paramount: This case underscores the critical need for clients to maintain meticulous and accurate records. The Court specifically noted that failure to keep and present such records counts heavily against a taxpayer’s attempted proof. Estimated expenses and incomplete records will likely be disallowed. Taxpayers need to understand the specific requirements under § 274(d) for travel and listed property.
Honesty and Transparency: Taxpayers cannot falsify documents or be uncooperative. Chopra’s lack of cooperation and the submission of altered documents were key factors in the Court’s determination of fraud. Transparency with the IRS is essential. The court specifically noted that Chopra offered a variety of implausible explanations. The court also noted the negative inferences it drew from the lack of cooperation.
Understanding the “Badges of Fraud”: Tax professionals should be aware of the “badges of fraud” and advise clients accordingly. Multiple indicators of fraud can be used to establish the taxpayer’s fraudulent intent. This includes understating income, failing to cooperate with tax authorities and providing false documents. The Court noted that multiple badges of fraud were present in the case.
Partnership Expense Deductions: It is important to understand the rules regarding deducting partnership expenses. A partner cannot deduct partnership expenses on their individual return unless the partnership agreement requires it.
Professional Skepticism: CPAs should exercise professional skepticism when reviewing client documents, as some clients may intentionally submit false or incomplete information. The court specifically noted that Chopra was not a credible witness.