Seini Liti Kolotolu Liti v. Commissioner of Internal Revenue

Seini and Kolotolu Liti (“the Litis”) appeal the denial of their motions for litigation costs and sanctions against the Commissioner of Internal Revenue (“CIR”). The Litis assert that the Tax Court erred in denying their motion for litigation costs, filed pursuant to Internal Revenue Code § 7430, 26 U.S.C. § 7430 . The Litis also contend that the Tax Court erred in summarily denying their motion for sanctions against the CIR, pursuant to I.R.C. § 6673, 26 U.S.C. § 6673 (a)(2). The Litis argue that the Tax Court erred by holding that the IRS was “substantially justified” in filing fraud charges against the Litis, thus preventing an award for litigation costs and sanctions.

I. FACTUAL AND PROCEDURAL BACKGROUND

This case arises from an IRS audit of the Litis’ 1995 and 1996 federal income tax returns. In November 1997, the IRS began an audit of the Litis’ 1995 income tax return and later expanded the audit to include their 1996 return. The Litis met with the IRS auditor at their home and provided bank statements from three accounts they used: 1) a business checking account; 2) a personal checking account; and 3) a savings account.

During the audit, the IRS auditor discovered a…