He Audited Taxpayers for the IRS. Then the Tax Court Hit Him With a 75% Fraud Penalty.

Peter J. Janangelo, Jr. spent nearly 20 years as an IRS revenue agent — examining other people’s returns for a living. He was also a licensed attorney, a CPA in two states, and admitted to practice before the Tax Court itself. In Janangelo v. Commissioner, the Tax Court sustained every dollar the IRS assessed against him — and added the harshest civil penalty in the tax code. His wife, who signed the same returns, walked away with no penalty at all. This is how both endings happened.

Who was the taxpayer in Janangelo v. Commissioner?

By any measure, this was not a taxpayer who could plead confusion. Peter Janangelo worked as an IRS revenue agent for nearly 20 years, examining returns and conducting audits. Before and alongside that career he ran a tax and estate practice, earned undergraduate and graduate business degrees, held CPA licenses in New York and Nevada, held a New York law license, and was admitted to practice before the U.S. Tax Court. He prepared the couple’s joint returns for 2018 through 2021 himself, and signed them as paid preparer.

His wife, Mary Ann Janangelo, is a retired registered nurse. She signed the joint returns he prepared. Keep that contrast in mind — the tax expertise in that household sank him, and it is also what saved her, because she reasonably relied on it.

The opinion — Janangelo v. Commissioner, T.C. Summary Opinion 2026-8 — was filed August 27, 2026, by Special Trial Judge Siegel, across four consolidated dockets (Nos. 13300-22S, 7232-23S, 14695-23S, and 11844-24S). The judge explained the opinion’s 32-page length in its second paragraph: taxpayer sophistication is one of the factors a court weighs when it tests for fraud, and “Mr. Janangelo is a pretty sophisticated taxpayer; Mr. Janangelo is an auditor at the IRS.”

What did the IRS assess — year by year?

The IRS disallowed every deduction at issue for all four years, determined deficiencies, and asserted the §6663 civil fraud penalty against Mr. Janangelo, with §6662 accuracy-related penalties in the alternative. The IRS dropped the fraud penalty as to Mrs. Janangelo. The numbers:

• 2018: $5,590 deficiency + $4,193 fraud penalty
• 2019: $6,090 deficiency + $4,568 fraud penalty
• 2020: $4,797 deficiency + $3,598 fraud penalty
• 2021: $17,867 deficiency + $13,400 fraud penalty

In total: $34,344 in deficiencies and $25,759 in fraud penalties — the fraud penalty is 75% of the portion of each underpayment attributable to fraud, before interest. The court sustained all of it as to Mr. Janangelo.

What was the “business” the court called a sham?

The timing tells the story. The Tax Cuts and Jobs Act added §67(g), which suspended miscellaneous itemized deductions for 2018 through 2025. The deductions Mr. Janangelo had claimed on Schedule A in 2016 — tax software, continuing education, professional dues, periodicals, postage — were suddenly worth nothing. Then, in late 2018, a new sole proprietorship appeared on his return: “SSA DCS” (SSA Disability Claim Services), supposedly formed so he could represent his own wife before the Social Security Administration.

The business reported just $812 in gross receipts against $23,354 in claimed expenses. The court’s findings dismantled the paper trail piece by piece:

• The Social Security disability application the business existed to handle was never filed.
• The engagement agreement was dated December 28, 2018, the client memo December 30 — and the whole activity ran 2.5 hours.
• The $812 “retainer” from his wife matched, almost to the dollar, what she paid him every December toward household expenses.
• A billing statement reported $14,500 in legal fees. After an IRS summons, the lawyer corrected it to $4,500 — the statement had been prepared from numbers Mr. Janangelo supplied — and the lawyer testified he had never heard of the business, did not handle Social Security claims, and performed no such work.
• One check bore the memo line “Oral hearing — 6/11/2018” — for a hearing that never happened, in a claim that was never filed.

The court held the activity was a sham: not a trade or business, and not an activity engaged in for profit under §183. Its primary objective, the court found, “was to avoid paying the correct amount of tax” — the same recurring personal expenses, reappearing each year under different labels after the law stopped allowing them.

What happened to the discrimination-lawsuit deductions?

For 2019, 2020, and 2021, Mr. Janangelo claimed above-the-line deductions tied to an age-discrimination case against the IRS: $25,374, then $19,987, then $74,447. The law he claimed them under, §62(a)(20), has a hard cap built in: legal expenses for a discrimination claim are deductible only up to the amount included in income from a judgment or settlement in that claim.

He lost his EEOC case on summary judgment. He received no judgment and no settlement — nothing. Zero included in income means a deduction capped at zero. The court allowed zero, for all three years.

Mixed into the claims were items §262 treats as personal living expenses: dog kenneling during a tax forum trip, cash car washes, toothpaste and shaving cream bought while traveling for continuing education, and a multi-day Los Angeles trip whose stated purpose was to locate a courthouse “just in case” the discrimination case went to trial. And on the 2019 return he claimed an $8,998 Health Savings Account–related deduction even though the couple’s health plan was not a high-deductible plan — an issue the IRS had already won against him for 2018. He claimed it again anyway.

Why couldn’t his spreadsheets save the deductions?

Instead of contemporaneous receipts, he offered self-prepared “workschedules” listing a date, a description, a payment method, and a payee. What they did not list was business purpose — and for travel and listed-property expenses, §274(d) requires substantiation of the amount, the time and place, and the business purpose. That statute forecloses estimation: a court cannot fill in the missing element.

The Cohan rule did not rescue him either. Cohan lets a court estimate the amount of an expense that has already been shown to be deductible. It does not establish deductibility in the first place — and where a receipt existed, he still could not articulate how the expense was appropriate and helpful to a business or connected to producing income.

How did a deduction case become a fraud case?

That is the line this opinion maps most precisely. Most disallowed-deduction cases end at negligence and a 20% accuracy penalty. Section 6663 is different: a 75% penalty on the portion of an underpayment due to fraud, which the IRS must prove by clear and convincing evidence — a higher standard than “more likely than not” — both an underpayment and intentional wrongdoing meant to evade a tax known to be owing. Fraud is never presumed, and simply disagreeing with the IRS is not fraud.

Courts look for “badges of fraud” — warning signs treated as evidence of intent. The court found several, together: understatement of income through overstated deductions, failure to maintain adequate records, implausible and inconsistent explanations, filing false documents, and failure to cooperate. And it weighed the badge that defined this case — sophistication. A taxpayer’s intelligence, education, and tax expertise are relevant to fraudulent intent. Mr. Janangelo did not merely claim deductions the code denies; the court found he built paper to support them — a retainer agreement between spouses, an $812 check that was really a household contribution, a fee statement built from his own numbers, a check memo for a hearing that never occurred. Documents that say things the facts do not support are what separate carelessness from intent. The court rejected his defense that he was only “utilizing the advantages of the tax law,” and sustained the fraud penalty for all four years.

The opinion closes with an unusual professional-conduct coda. Appearing for himself (pro se) and as counsel for his wife, Mr. Janangelo filed a motion attaching a document sealed by another court, together with Department of Justice correspondence about an unrelated taxpayer he was handling in his IRS capacity. The court called his attention to Tax Court Rule 33(b), to Circular 230, and to the rules on candor and confidentiality — and sealed the motion. Asked about §6103, the taxpayer-confidentiality statute, he answered that “on balance the rights of the Petitioners in seeking a continuance outweighed the disclosure issue.” The court’s response, in full: “It did not, and we sealed his motion.”

Why was his wife spared any penalty?

The same expertise, cutting the other way. Mrs. Janangelo had used professional preparers before the marriage. Every disputed deduction traced to her husband’s activities, and her husband is a tax professional employed by the IRS. The court held her reliance on him was reasonable cause in good faith under §6664(c)(1), and relieved her of the §6662 accuracy-related penalties entirely — without needing to reach innocent-spouse relief under §6015 at all.

One limit matters: this was a penalty ruling. On a joint return, both spouses remain responsible for the tax itself. Beating the penalty is not the same as beating the bill.

Does this case set a precedent?

No — and the blog will not pretend otherwise. This is a summary opinion in a small tax case under §7463. Under §7463(b), the decision is not reviewable by any other court and cannot be treated as precedent in any other case. Nothing in it binds a future court. Its value is as a working illustration: how the badges of fraud assemble into clear and convincing evidence, and exactly where a 20% negligence case crosses into a 75% fraud case.

The checklist: keeping a deduction case from becoming a fraud case

• A Schedule C needs a real business. A real profit motive, real activity, real customers. Paper formed in the last days of December, around a task that never happens, is what a sham looks like.
• When a deduction category closes, it closes. Relabeling the same personal expenses under a new form does not revive them — in this case it became evidence of intent.
• Never build the paper after the fact. Agreements, invoices, and memos must describe things that actually happened. A document the other party disowns under summons is worse than no document.
• Substantiate purpose, not just payment. Date, amount, payee — and the business purpose, written down at the time. A spreadsheet you made yourself, without purpose, failed even a CPA who audits for a living.
• A capped deduction needs the income first. Under §62(a)(20), no judgment or settlement means no amount to deduct against — the cap is zero.
• Do not re-claim a lost issue. Re-filing the same HSA position the IRS had already beaten the year before reads as knowledge, not mistake.
• Credentials raise the bar. The more tax knowledge you have — or hold yourself out as having — the less room there is for “I misunderstood.”

Alex Volkov, CPA is a New York-licensed CPA with over two decades in accounting, focused on resolving IRS tax problems — back taxes, liens, levies, garnishments, and audits — for individuals and businesses in all 50 states and around the world.