Tax Court in Brief | Metz v. Commissioner | Interplay of Criminal Tax, Civil Tax, and Civil Penalties

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The Tax Court in Brief – April 4th- April 8th, 2022

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Tax Litigation:  The Week of April 4th, 2022, through April 8th, 2022

Metz v. Comm’r, T.C. Memo. 2022-33 | April 7, 2022 | Weiler, J. | Dkt. No. 16784-19

Short Summary: During tax years 2000 through 2008, Daniel Metz (“Petitioner”) worked as a professional engineer. Petitioner formed Metz & Associates, Inc. in 1994 and was the sole shareholder until 2007. At that time, he dissolved Metz & Associates, Inc. and formed Metz & Associates, LLC and held a 94% membership interest. During the years at issue, Petitioner was an employee of both entities and received a salary.

For tax years 2000 through 2007, Petitioner timely filed Forms 1120S for Metz & Associates, Inc. and timely filed Forms 1065 for Metz & Associates, LLC for tax years 2007 and 2008. However, Petitioner did not timely file Forms 1040 for those tax years. Instead, for tax years 2000 and 2001, Petitioner filed “Statements,” whereby he argued that he was not required to file Forms 1040. The Internal Revenue Service (“IRS”) initiated an audit in 2009, and Petitioner filed Forms 1040 for tax years 2000 through 2007. The IRS, however, prepared a substitute for return for tax year 2008.

As part of a fraudulent scheme to obtain withholding credits, Petitioner submitted forged Forms 1099-OID with his Forms 1040 for tax years 2000 through 2007—claiming $1,297,490 in fraudulent refunds. After the Criminal Investigation Division of the IRS opened an investigation for tax years 2005 through 2007, Petitioner was ultimately convicted and sentenced for three counts of filing false or fraudulent claims and one count of attempting to obstruct or interfere with the Internal Revenue Laws. Moreover, Petitioner failed to cooperate with the IRS, taking various actions, such as: arguing that he was not subject to the Internal Revenue Code, submitting interrogatories to the IRS, failing to comply with certain summonses and information document requests, and seeking an injunction to prevent the IRS from continuing its audit.

Pursuant to its audit and reconstructing Taxpayer’s income based on its bank statement analysis, the IRS issued a notice of deficiency for tax years 2000 through 2008, determining Petitioner was liable for certain tax deficiencies and additions to tax/penalties under Sections 6663(a), 6651(a)(1), 6651(a)(2), and 6654. Petitioner timely petitioned the Tax Court and submitted the case for decision without trial under Rule 122.

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Insight: Metz effectively deals with the civil assessments by the IRS against a tax protester. Additionally, Metz discusses the interplay between criminal tax violations (i.e., restitution) and civil tax and penalty assessments. Taxpayers should be mindful of their income tax reporting obligations, particularly when they wholly own or have majority interests in business entities. However, if taxpayers engage in fraud and openly protest the IRS, they may face exposure to both criminal and civil penalties.

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