By Henry Stow Lovejoy
Two recent Tax Court cases, E.J. Kernan 1 and J.R. Banister , 2 illustrate both the use of the fraudulent failure to file penalty under Code Sec. 6651(f ) against “tax protesters” and the difficulties in applying the penalty. The cases are quite close in their facts, but give different results, one case applying the penalty and the other not. In each case, the penalty was imposed on a tax protester who marketed tax non-filing arguments and followed his own advice. But in one case the protester avoided the fraudulent failure to file penalty through a good-faith, if mistaken, belief, while in the other case the protester suffered the penalty, perhaps because he chose not to testify.
Fraudulent Failure to File and Badges of Fraud
The fraudulent failure to file penalty is an increase in the general failure to file penalty under Code Sec. 6651 . Code Sec. 6651(a)(1) provides, in relevant part:
In case of failure ... to file any return required ... on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.