Wife Held Not Liable for Fraud Penalties for Husband’s Illicit Business – By John R. Bullis

Kim Pilant Uncategorized

Bradley Ballard operated a sole owner business named Quik Copy.  He specialized in the unauthorized duplication of copyrighted works.  He concealed his piracy by dealing mostly in cash, not keeping any financial or business records except he had numerous bank accounts.

IRS audited his 2008 and 2009 returns and did a bank deposit analysis.  Total bank deposits were income unless he could show why the deposits were not income.  IRS determined he underreported the business gross receipts by about $1,100,000 in 2008 and underreported 2009 gross receipts by about $741,000.

The Tax Court had to decide if Mrs. Ballard was liable to pay the 75% fraud penalty.  The court noted she filed her 2008 return as head of household and claimed her three children as dependents.  (Mr. Ballard filed his 2008 return five months late, reporting himself as single with no dependents).

For 2009, Mr. Ballard filed as head of household, claiming Mrs. Ballard’s children as dependents.  She did not sign that return and also did not file a separate return.

The court found Mr. Ballard’s unauthorized duplication and sale of DVDs and CDs and his practice of dealing in cash to be “badges” or indications of fraud.  Also he did not keep any books and records of the illicit business activities.  He filed false returns by understating the income and claiming expenses he could not prove.  The court found his actions in 2008 and 2009 clearly indicated his intent to conceal income and prevent the collection of tax.

For Mrs. Ballard, the court found no facts that indicated she knew about or aided in the preparation of the fraudulent 2009 head of household return he filed.  She did not sign it (but she normally would not sign his head of household return).  And, IRS did not find she made a habit of underreporting her income or underpaying her tax liabilities.  The court found the facts showed she was not involved in his business activities, legitimate or illicit.  It seems she did not know of the illicit bank accounts and was not authorized to draw checks on those bank accounts.

The court found Mrs. Ballard was not guilty of fraudulent intent or actions so she was not charged with the civil fraud penalty.

The 75% fraud penalty was imposed on Mr. Ballard for 2008 and 2009 returns.

Did you hear “Conversation means being able to disagree and still continue the discussion.”

Dwight MacDonald, Author and editor.