Restauranteur Fails to Pin $1.6 Million Omission on Accountant; Slammed with Fraud Penalty

The Tax Court determined a restaurant owner had vastly underreported his businesses income for multiple years, and found the taxpayer's attempt to shift blame to his accountant unconvincing. The court determined the omission was fraudulent, noting the taxpayer met multiple "badges of fraud," and imposed a 75 percent penalty. Musa v. Comm'r, T.C. Memo. 2015-58.

Alaa Musa formed Casablanca Restaurant, LLC (Casablanca) as a single-member limited liability company in 2005. The restaurant used an industry standard point-of-sale system to fulfill orders and record sales reports from cash and credit card purchases. Musa kept diligent records of credit card receipts, but he would frequently throw away the records of the cash receipts. Musa never deposited more than a minimal amount of Casablanca's cash receipts into the operating account and would generally take the cash home with him.

In early 2006, Musa hired J&M Accounting & Tax Services (J&M) to provide accounting and tax services for Casablanca. J&M prepared monthly sales tax returns for Casablanca based on sales numbers Musa provided over the phone. Musa did not provide J&M with copies of daily sales reports, and the sales numbers he provided were far below what was reflected on the reports.

The IRS audited Casablanca for 2006 to 2009 and issued a notice of deficiency. The audit found Musa had vastly underreported the restaurant's income in excess of $1.6 million, and the IRS assessed a civil fraud penalty under Code Sec. 6663(a).

Musa argued that his accountant at J&M was to blame for the inaccuracies in his tax returns, claiming that J&M had access to his financial records and chose to underreport his income. The tax court found this unconvincing and implausible, noting that J&M did not have access to the point-of-sale reports until after the audit began, that Musa failed to disclose all of his bank accounts, and that he gave no explanation as to why his accountant would be motivated to prepare grossly inaccurate returns. Further, the court noted that under Metra Chem Corp. v. Comm'r, 88 T.C. 654 (1987), as a general rule, taxpayers cannot avoid the duty of filing accurate returns by placing responsibility on a tax return preparer.