When a Tax Court case opens with “petitioner is a fugitive from justice, living abroad, perhaps in Khartoum, Sudan,” I wonder whether the taxpayer can win against the government. When I further read about a state sales-tax audit leading to a law enforcement sting netting nine people in custody, but that the “petitioner avoided arrest [and] . . . is subject to outstanding arrest warrants for numerous criminal offenses, including theft of sales tax, the filing of false and fraudulent State tax returns, racketeering, and money laundering,” I’ll bet that the IRS wins this case, no matter what. But sometimes the underdog prevails.

Here, it’s Abdalla Mohamed, the owner of several beauty-supply corporations, a fellow who apparently bilked tax authorities out of hundreds of thousands of dollars, laundered money, and fled the country.
First, the IRS did an audit and found underreporting of more than $300,000 in tax (or almost $1 million in income) for 2006 and 2007. Mr. Mohamed was not present for the audit. His attorney agreed to the deficiencies in income tax, but not to the fraud penalties that the IRS tried to assess. So the Tax Court only needed to decide whether to impose the fraud penalty or not.

For 2006, the IRS laid out the paper trail showing that the corporations made far more money than Mr. Mohamed allowed to be shown on his tax returns, and the fraud penalty applied. For the 2007 tax year, a small fact complicated things: Mr. Mohamed had his tax preparer sign and file the return on his behalf, rather than signing it himself.

As a result, Judge Halpern declared that Mr. Mohamed’s 2007 return was not valid. If there is no valid return, there is no understatement of tax, because there is no original statement of tax. For the fraud penalty of IRC § 6663 to attach, there must be an understatement of tax. So no fraud penalty for 2007.
But the IRS wouldn’t just give in easily. It next argued that Mr. Mohamed’s 2007 return got filed late – indeed, no tax return was filed at all – so the taxpayer owes a delinquency penalty under IRC § 6651, and since the taxpayer clearly intended to defraud the government with the attempted return, he owes the 75 percent penalty for fraudulent-failure-to-file, IRC § 6651(f).

At trial, Judge Halpern didn’t like this argument. He pointed out that, for the section 6651(f) 75 percent penalty to apply, the failure to file the return had to be fraudulent. Here, the taxpayer fully intended to file a return on time, and took the steps that he thought would achieve that result (letting his tax preparer sign the return), only to be denied the filing at the last moment – or even after the last moment, since it was Judge Halpern who decided it was not a valid return. In fact, Judge Halpern found that Mr. Mohamed’s delinquency was perfectly reasonable (the taxpayer often used his accountant to perform his tasks), and qualified him for the “good cause” exception to the delinquency penalty.

So for the 2007 tax year, Mr. Mohamed had no penalty at all!
Of course, Mr. Mohamed’s victory is relatively small. He still owes close to a million dollars in taxes and penalties.

I find it remarkable that he even bothered to fight this fight. He probably has no assets left in this country and cannot return; why pay an attorney to change his total bill to the IRS from $1 million to $800,000? And yet, the decision helps other taxpayers because it clarifies the elements of tax fraud and the delinquency penalty.
If you have issues with tax fraud or the delinquency penalty, particularly if the IRS is on you like a hungry pit bull on a steak, I am very interested in helping you out.