Federal Tax Day - Current, J.1, Corporate Payments of Personal Expenses Resulted in Civil Fraud Penalties (Prezioso, TCM) , (Jul 29, 2026)

A married couple was liable for civil fraud penalties after failing to report income arising from a closely held corporation's payment of the husband's personal expenses. The IRS challenged the unreported income and asserted civil fraud penalties under Code Sec. 6663.

The record showed that the husband maintained two sets of accounting records and disguised personal expenses as business expenses by altering payee names and expense classifications. Additionally, personal expenditures were recorded as business costs rather than officer compensation, preventing them from being reported on Forms W-2, Wage and Tax Statement, or included in taxable income. The arrangement also involved misleading bookkeeping records, inaccurate information provided to the corporation's accountant, and consistent understatement of income over multiple tax years. Thus, the payments were intentionally concealed from federal income tax reporting.

Further, the evidence established fraudulent intent through misleading accounting practices, inadequate books and records, concealment of income, and repeated underreporting of taxable income. Accordingly, the civil fraud penalties were sustained under Code Sec. 6663. The written supervisory approval requirement for the penalties also was satisfied under Code Sec. 6751(b).

W.D. Prezioso, TC Memo. 2026-63, Dec. 62,876(M)