How it works
Section 6663 imposes a 75 percent penalty on the portion of an underpayment attributable to fraud. The IRS must prove fraud by clear and convincing evidence, usually through badges of fraud: concealed income, false records, dealing in cash, implausible explanations, and a pattern of underreporting. Once fraud is shown for any part of the underpayment, the whole underpayment is presumed fraudulent unless the taxpayer proves otherwise. There is no statute of limitations on a fraudulent return.
Why it matters
The fraud penalty is civil, but it often accompanies a criminal referral, and the same facts decide both. How an audit is handled from the first response can determine whether the IRS sees negligence or fraud.
Example
A taxpayer used a mixer to move crypto, answered no to the digital asset question, and told the auditor he never owned crypto. Those facts support a fraud penalty of 75 percent on the resulting underpayment, and a referral.
Related: badges of fraud, tax fraud versus negligence, tax evasion. Read more: tax fraud defense.
