Owner Who Ran 400 Personal Checks Through His Machine Shop Hit With 75% Fraud Penalty

A California machine-shop owner who paid a long list of personal bills from his company's accounts has been assessed the 75% civil fraud penalty, in a Tax Court memorandum opinion issued July 28. According to an August roundup by Reed Corporation CPA, Prezioso v. Commissioner, T.C. Memo. 2026-63, involved more than 400 personal checks written through the business, covering expenses ranging from home renovations to a boat to a Ferrari lease, none of which were reported as income to the owner. The court's analysis turned on the pattern of concealment, not on how aggressive any single deduction was.

What the court found

Most disputes over business expenses end with a disallowed deduction, back tax, interest and perhaps a 20% accuracy-related penalty. Fraud is a different category. The IRS must prove it by clear and convincing evidence, and the court looks for badges of fraud such as inadequate records, implausible explanations, concealment of income and a consistent pattern over time.

In Prezioso, the roundup notes, the dollar amount of the deductions mattered less than how they were handled. Running hundreds of personal payments through business accounts, classifying them as company costs and leaving them off the owner's return presented the court with the kind of repeated, deliberate conduct that supports a fraud finding. Once fraud is established, the penalty equals 75% of the underpayment attributable to it, and the normal three-year limit on assessment does not protect the years involved.

A second case in the same roundup reinforces the point. In Janangelo v. Commissioner, a summary opinion issued August 27, an IRS auditor who was also a CPA was assessed the same 75% penalty across four years. Professional credentials and detailed spreadsheets did not help when the underlying numbers did not hold up.

Who is affected

The lesson applies to owners of closely held corporations, S corporations, partnerships and single-member LLCs, especially where one person controls both the books and the bank accounts. Mixed-use spending is common in these companies: vehicles, phones, travel that combines business and family, home offices and entertainment. The line the court drew is not between perks and no perks, but between documented business use and personal consumption dressed up as a business cost.

The after-tax math

When a corporation pays an owner's personal expenses, the IRS typically treats the payments as constructive dividends or additional compensation. The company loses the deduction, and the owner has unreported income.

Example, illustrative round numbers and an assumed 30% combined rate: a shop owner runs $200,000 of personal spending through the business over several years. Recharacterized, that creates roughly $60,000 of additional tax. With a negligence-level penalty of 20%, the penalty would be about $12,000. If the court finds fraud, the 75% penalty on the same underpayment is about $45,000, before interest, and years that would otherwise be closed can be reopened. The difference between a sloppy return and a fraudulent one, in this example, is $33,000 in penalty alone, plus the loss of any statute-of-limitations protection.

Practices worth discussing with a CPA

• Keeping separate business and personal accounts and cards, and reimbursing the company promptly for any personal charge that slips through.
• Using a written accountable plan for employee and owner expense reimbursements, with receipts and business purpose recorded at the time.
• Maintaining usage logs for vehicles and other mixed-use property, and allocating costs between business and personal use.
• Paying reasonable salary or documented distributions to owners, rather than covering household costs from the business.
• Having an outside bookkeeper or CPA review classifications at least annually, particularly for large or unusual payments.

What to watch

Tax Court memorandum opinions in 2026 have repeatedly upheld fraud penalties where concealment was systematic. For business owners already under examination for commingled spending, the handling of records and explanations during the audit can influence whether the case stays a deduction dispute or becomes a fraud case. Owners in that position often retain a tax attorney as well as a CPA.

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