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Arizona laundromat owner found liable for fraud penalties for unreported check-cashing income

On Behalf of | Dec 10, 2013 | IRS, Tax Crimes |

Yesterday the Tax Court issued an opinion in Abdallah v. Commissioner, T.C. Memo. 2013-279, finding that a laundromat owner had fraudulently underreported income for several years and was liable for civil fraud penalties under I.R.C. § 6663(a). In addition to providing laundry services, the taxpayer-husband (“taxpayer”) also cashed payroll checks for clients who did not have valid government-issued identification and who could not otherwise open bank accounts. The taxpayer charged a .75% fee per transaction, but didn’t report any of the income from the fees he received.

The taxpayer previously had been investigated by the IRS Criminal Investigation Division, eventually pleading guilty to a charge of willfully making and subscribing a materially false return under I.R.C. § 7206(1) with respect to one of the years at issue in the Tax Court proceeding. In his plea agreement, the taxpayer admitted that he had “knowingly and intentionally underreported [his] income to the Internal Revenue Service in order to pay less in taxes.” The plea agreement also provided that that “the defendant shall retain the right to assert any and all defenses in any civil tax audit, controversy, appeal or litigation.”

Despite the prior guilty plea, the Tax Court found that the taxpayer was not collaterally estopped from contesting the fraud penalty in his Tax Court proceeding, citing Considine v. United States, 683 F.2d 1285, 1287 (9th Cir. 1982). This should be contrasted with the Tax Court’s holding last week in Senyszyn, in which the Court found that the taxpayer was collaterally estopped from contesting the fraud penalty due to a prior guilty plea in a criminal tax case.

These two cases highlight the differing impact that criminal convictions have in later civil proceedings for collateral estoppel purposes. In a felony conviction under I.R.C. § 7206(1), which was implicated yesterday in Abdallah, an “intent to evade taxes” is not an essential element because § 7206(1) involves willfully making and subscribing a materially false return. Accordingly, a taxpayer is still entitled to dispute a fraud penalty in a civil case even if it relates to the same year at issue in the earlier criminal case. In contrast, a conviction under I.R.C. § 7201, which was implicated in Senyszyn, involves a knowing and willful attempt to evade tax, and therefore provides a basis for a later application of collateral estoppel with respect to a fraud penalty.

While collateral estoppel didn’t preclude the taxpayer in Abdallah from disputing the fraud penalties in his Tax Court proceeding, the Court nonetheless held that the taxpayer was liable for the fraud penalties for each of the years at issue. The Court found that the taxpayer knew he was underreporting income because he included much higher income amounts on loan applications than he reported on his tax returns, and because of his pattern of consistently omitting large amounts of income.


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