Accuracy - Fraud Penalty - Audit Techniques Guide | irstaxattorney.com

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Annoucement 2002-2
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Audit Techniques Guide

Chapter 6: Fraud Penalty – IRC § 6663

Introduction
IRC § 6663(a) provides that if any underpayment of tax is due to fraud, a penalty is imposed equal to 75 percent of the portion of the underpayment due to fraud. For purposes of IRC § 6663, a portion of the underpayment will be considered to be due to fraud where it is the result of intent to evade tax.

IRC § 6663 does not define “fraud.” Courts have long recognized that the essence of the fraud penalty is the taxpayer’s state of mind. The state of mind required has been described in various ways, but most definitions require “intent to evade tax.” Intent is distinguished from inadvertence, reliance on incorrect professional advice, honest difference of opinion, negligence or carelessness.

For purposes of brevity, this chapter does not include an expansive discussion of the fraud penalty. If an examiner encounters facts and circumstances in a tax shelter audit that are so egregious that they appear to rise to the level of fraud, the following links to the IRM Penalty Handbook should be considered:

Handbook Title	IRM Reference
Recognizing and Developing Fraud	25.1.2
Criminal Referrals	25.1.3
Civil Fraud	25.1.6

In addition, examiners should coordinate closely with local Chief Counsel attorneys on cases involving potential fraud.