Peter J. Janangelo, Jr. and Mary Ann Janangelo v. Commissioner of Internal Revenue, T.C. Summary Opinion 2026-8 (Tax Ct. Aug. 27, 2026)

Tax professionals are often held to a higher standard of compliance due to their education, credentials, and experience. In Janangelo v. Commissioner, T.C. Summary Opinion 2026-8, the United States Tax Court delivered a stark reminder that professional tax expertise can be a double-edged sword. Rather than shielding a taxpayer from scrutiny, professional sophistication can serve as the primary catalyst for proving fraudulent intent.

The Double-Edged Sword of Tax Professional Sophistication

Peter J. Janangelo, Jr. was not an ordinary taxpayer. At the time of his trial, he had been employed full-time for nearly 20 years as a revenue agent for the Internal Revenue Service, where his daily responsibilities included conducting audits and reviewing tax returns. He was also an active union steward and belonged to the National Treasury Employees Union (NTEU).

Before his long tenure at the IRS, Mr. Janangelo operated a private tax and estate planning practice in the New York City metropolitan area and served as an auditor for several government entities. His academic and professional credentials were extraordinary: he held both undergraduate and graduate degrees in business administration, was a licensed attorney in New York admitted to practice before the Tax Court, and was a licensed Certified Public Accountant (CPA) in both Nevada and New York.

To maintain these professional licenses, Mr. Janangelo was required to complete regular continuing legal education (CLE) and continuing professional education (CPE) credits. Interestingly, although the IRS offered in-house educational programs that would satisfy these requirements, he routinely chose to attend outside seminars, explaining that he “preferred to keep his training ‘separate from his employment with the IRS.’”

His wife, Mary Ann Janangelo, was a retired registered nurse who suffered from long-term health challenges. Although she signed their joint tax returns under penalty of perjury as required by Internal Revenue Code (IRC) Section 6065, Mr. Janangelo managed all household finances and prepared the returns.

When the IRS audited their joint returns for 2018, 2019, 2020, and 2021, Mr. Janangelo’s extensive background backfired spectacularly. As Special Trial Judge Siegel noted at the outset of the Tax Court’s 32-page opinion:

“But really, this Opinion is long because one of the factors we consider in evaluating fraud is the sophistication of the taxpayer. And Mr. Janangelo is a pretty sophisticated taxpayer; Mr. Janangelo is an auditor at the IRS.”

Overview of the Deficiencies and IRS Determinations

The IRS issued Notices of Deficiency to the Janangelos for the tax years 2018 through 2021, asserting substantial deficiencies and civil fraud penalties against Mr. Janangelo under Section 6663(a). Accuracy-related penalties under Section 6662(a) were approved in the alternative. While the IRS conceded the civil fraud penalties as to Mrs. Janangelo, it maintained that she was liable for the alternative negligence or substantial understatement penalties under Section 6662.

The determined deficiencies and Section 6663(a) penalties were as follows:

2018: Deficiency of $5,590 and a civil fraud penalty of $4,193.
2019: Deficiency of $6,090 and a civil fraud penalty of $4,568.
2020: Deficiency of $4,797 and a civil fraud penalty of $3,598.
2021: Deficiency of $17,867 and a civil fraud penalty of $13,400.

The primary adjustments across these years stemmed from two main categories: a purported sole proprietorship reported on Schedule C for 2018, and massive deductions claimed for unreimbursed employee business expenses and civil litigation costs for 2019, 2020, and 2021.

The Social Security Disability Claim Services Schedule C Sham

Following the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA), which suspended miscellaneous itemized deductions under Section 67(g) for tax years 2018 through 2025, Mr. Janangelo shifted his tax strategy. On his 2018 return, he reported a sole proprietorship on Schedule C under the name “Peter J. Janangelo, Jr., SSA Disability Claim Services” (SSA DCS).

The stated business purpose of SSA DCS was to represent his wife before the Social Security Administration (SSA) regarding a potential application for disability benefits. Because his IRS employment strictly prohibited him from performing outside legal work, Mr. Janangelo requested permission to represent his wife in September 2018, asserting that the representation did not involve “any ‘tax matters.’” However, the record was unclear if he ever received permission, and more importantly, no application for SSA disability benefits was ever filed on behalf of Mrs. Janangelo.

The financial transactions of this “business” were highly suspect. The couple maintained separate bank accounts and split living expenses. Mrs. Janangelo would typically pay her husband $900 every two weeks (or $1,800 monthly) to cover her half of household costs. In December 2018, Mrs. Janangelo wrote her husband three checks: one for $900, one for $100, and one for $812. The Janangelos argued that the $812 check, dated December 28, 2018, represented a payment for professional services under an SSA DCS “retainer agreement” signed that same day.

The Court rejected this characterization, finding that the December checks totaled $1,812—virtually identical to Mrs. Janangelo’s routine monthly household contribution. Furthermore, the $812 check was made out to Mr. Janangelo personally, not to SSA DCS. The Court concluded that “the check represented Mrs. Janangelo’s share of routine household expenses rather than a genuine payment for services” and “did not represent legitimate income.”

Despite reporting only $812 in “gross receipts,” Mr. Janangelo claimed an astounding $23,354 in business expenses on Schedule C:

Legal and Professional Services: $16,844.
Other Expenses (including Drake Tax software, CPE, bar and union dues, and periodicals): $5,546.
Insurance (other than health): $617.
Supplies: $347.

The legal fees deduction was particularly egregious. Mr. Janangelo claimed SSA DCS paid $14,500 of the $16,844 to his personal attorney, James P. Kemp, for SSA-related matters. To support this, Mr. Janangelo produced checks made out to Mr. Kemp. One check, dated May 12, 2018, bore the memo “Oral hearing – 6/11/2018.” Yet, there was never any hearing regarding Mrs. Janangelo’s disability benefits. Another check, dated September 26, 2018, was marked “IRC Number 212, SCOTUS litigation costs,” which actually related to Mr. Janangelo’s personal Freedom of Information Act (FOIA) litigation against TIGTA.

Further, after being served with an IRS summons, Mr. Kemp provided his actual billing records showing that Mr. Janangelo had only paid him $4,500 in 2018. Mr. Kemp testified that he had previously signed a billing statement reflecting $14,500 only because he relied on figures provided to him by Mr. Janangelo without checking his own billing records. Mr. Kemp, whose practice did not even handle SSA disability claims, testified under oath that “he did not know what SSA DCS was” and “did not provide any legal services at all to Mrs. Janangelo or to SSA DCS.”

The Court had no difficulty categorizing the entire operation as a sham, citing Falsetti v. Commissioner:

“We define ‘sham in substance’ as the expedient of drawing up papers to characterize transactions contrary to objective economic realities and which have no economic significance beyond expected tax benefits.”

The judge concluded that the Schedule C business was simply “drawing up papers” and constituted a clear sham designed to bypass the TCJA’s limitations on employee business expense deductions.

The Unsubstantiated Discrimination Lawsuit and Personal Deductions

For the tax years 2019, 2020, and 2021, Mr. Janangelo claimed massive deductions of $25,374, $19,987, and $74,447, respectively, as “other adjustments affecting AGI.” He asserted that these deductions represented legal and non-legal expenses incurred in pursuing an age discrimination lawsuit against the IRS following his non-selection for an Appeals officer promotion.

The legal fees paid to his discrimination counsel (Gilbert Employment Law) and a court reporter were indeed documented. However, under Section 62(a)(20), an above-the-line deduction for attorney’s fees and court costs in a discrimination suit is strictly capped at the “amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement.” Because the EEOC granted summary judgment in the Government’s favor and Mr. Janangelo received no settlement or monetary award of any kind, his allowable deduction under Section 62(a)(20) was zero.

Despite this explicit statutory limitation, Mr. Janangelo argued that the cap did not apply to him because he “would have won his case but for the ‘lies’ told by the IRS during the related depositions.” The Court dismissed this argument as entirely unsupported by legal authority.

Even more troubling was Mr. Janangelo’s practice of wrapping completely personal expenses into his litigation and business expense tallies, claiming them as business expenses under Section 162 or production-of-income expenses under Section 212. These included:

Dog Kenneling: He deducted $295 to kennel the family dogs while he attended the 2019 IRS Tax Forum.
Car Washes: He claimed cash car washes ($36 and $40) in connection with travel to professional conferences.
Toiletries: He deducted $115 and $185 for personal grooming items, including toothpaste, hand sanitizer, and shaving cream purchased while traveling for CPE conferences.
The “Courthouse Trip”: In 2021, he deducted the entire cost of a multi-day trip to Los Angeles, claiming its purpose was “to find out where a particular courthouse used by the EEOC was located, just in case his age discrimination case had gone to trial.”

When questioned about deducting personal items like toiletries, Mr. Janangelo testified:

“When I’m out of town attending CPE, if I buy shaving cream, hand sanitizer. . . . I consider those to be related to my getting . . . CPE credits. I’m not going to drive home from San Diego to pick up my toothpaste, as opposed to just buying it in CVS.”

The Court rejected this rationale, reiterating that under Section 262(a), personal, living, or family expenses are strictly nondeductible unless expressly permitted by the Code. Under Treasury Regulation Section 1.213-1(e)(2), personal grooming items like toothpaste and shaving cream are inherently personal and cannot be deducted even as medical expenses, let alone business expenses. Kenneling dogs is likewise “a personal expense, not a business one.”

The Disallowed Health Savings Account Exception

The taxpayer’s disregard for clear statutory boundaries was further demonstrated by an $8,998 deduction claimed on their 2019 return, labeled on his workschedules as a “disagreed amt. – re: IRC §223(c)(2).”

To claim a deductible contribution to a Health Savings Account (HSA) under Section 223(c)(1)(A), a taxpayer must be an “eligible individual” enrolled in a “high deductible health plan” (HDHP). The Janangelos, however, were enrolled in the American Postal Workers Union High Option Health Plan (APWUHP)—a disqualifying non-HDHP.

The IRS had already litigated this exact issue against Mr. Janangelo in a payroll tax collection action for the 2018 tax year, which resolved in the government’s favor and established that the APWUHP did not qualify as an HDHP. Despite this binding resolution, Mr. Janangelo claimed the 2019 deduction anyway, testifying:

“I didn’t take a deduction for an HSA. I took a deduction in 2019, . . . , for an exception which treats it for income tax purposes--because of the change in the amount of deductibles, it treats it for income tax purposes as essentially a high-deductible health plan, but it’s not a high-deductible health plan. It’s a carve-out, I think because Congress keeps changing the rules on the amount of the deductible.”

The Court found no legal support for this purported “carve-out” or “exception.” The judge noted that because the trial took place after his prior HSA litigation had been decided, Mr. Janangelo was fully aware of the law but “continued to make the argument anyway.”

The Court’s Substantiation and Cohan Rule Analysis

Under Welch v. Helvering, 290 U.S. 111 (1933), the Commissioner’s deficiency determinations are presumed correct, and the taxpayer bears the burden of proving entitlement to any claimed deductions. Section 6001 and Treasury Regulation Section 1.6001-1(a) require taxpayers to keep and maintain books and records sufficient to establish their return positions.

To satisfy his substantiation burden, Mr. Janangelo did not provide contemporaneous receipts or invoices. Instead, he relied on self-prepared spreadsheets he called “workschedules,” which listed the date, description, payment method, and payee. Crucially, these lists completely omitted the business purpose of the expenditures.

The Court explained that while some unsubstantiated business expenses can be estimated under the Cohan rule (Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)), the Court will not do so unless the taxpayer presents a sufficient evidentiary basis to make a reasonable estimate; the Court “can’t just guess.”

More importantly, Section 274(d) imposes strict, heightened substantiation standards for traveling expenses, entertainment, and listed property (such as passenger automobiles). These expenses cannot be estimated under the Cohan rule. Under Temporary Treasury Regulation Section 1.274-5T(a), a taxpayer must substantiate traveling expenses with adequate records or corroborating evidence detailing the precise amount, time, place, and business purpose of each expenditure. This requires contemporaneously prepared logs, trip sheets, and documentary evidence like receipts. Mr. Janangelo’s self-serving spreadsheets failed this standard completely.

In an attempt to excuse his lack of documentation, Mr. Janangelo argued that taxpayers are “not required to substantiate any expense under $75, no matter what the category.” The Court flatly rejected this, noting that he cited no legal authority for his position, and under Tokarski v. Commissioner, 87 T.C. 74 (1986), the Court is not required to accept a taxpayer’s self-serving, uncorroborated testimony.

The Section 183 Hobby Loss and Profit Objective Test

Even if Mr. Janangelo’s Schedule C expenses for SSA DCS had been fully substantiated, they would be disallowed under Section 183. Under Section 183(a) and (b), if an activity is “not engaged in for profit,” deductions are strictly limited to the gross income generated by the activity (which, in this case, was zero, as the $812 check was deemed personal household expense share).

Deductions under Section 162 or Section 212 require that a taxpayer engage in the activity with the “actual and honest objective of making a profit.” Under Wolf v. Commissioner, 4 F.3d 709 (9th Cir. 1993), this profit objective must be “independent of tax savings.”

Treasury Regulation Section 1.183-2(b) provides a nonexclusive list of nine factors to evaluate a taxpayer’s profit objective, including the manner in which the activity is conducted, the expertise of the taxpayer, the time and effort expended, and the history of income or losses.

Applying these factors, the Court observed that Mr. Janangelo spent a grand total of 2.5 hours on the activity in 2018 (and zero hours in any other year) to review a website and write a short memo. The “business” operated for at most 3.5 months, yet he claimed deductions for expenses incurred throughout the entire calendar year. The Court concluded that the activity lacked a bona fide profit motive and was merely an intentional effort to minimize his taxable income after the TCJA eliminated his miscellaneous itemized deductions.

The Clear and Convincing Evidence of Civil Fraud

The most severe aspect of the Tax Court’s ruling was the sustaining of the 75% civil fraud penalty under Section 6663(a). To establish fraud, the IRS must prove by clear and convincing evidence that (1) an underpayment of tax exists, and (2) the taxpayer “intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes” (DiLeo v. Commissioner, 96 T.C. 858, 874 (1991)).

Because direct evidence of fraudulent intent is rarely available, courts rely on several circumstantial “badges of fraud” established in Niedringhaus v. Commissioner, 99 T.C. 202 (1992). These badges include:

Overstating deductions (which constitutes an understatement of income under Hicks Co. v. Commissioner, 56 T.C. 982 (1971)).
Failing to maintain adequate records under Section 6001.
Offering implausible or inconsistent explanations.
Filing false documents.
Failing to cooperate with tax authorities.
Offering false or non-credible testimony.

Crucially, the Court evaluated these badges through the lens of Mr. Janangelo’s specific professional background. Citing Cole v. Commissioner, T.C. Memo. 2010-31, the Court reiterated that “a taxpayer’s intelligence, education, and tax expertise are relevant in determining fraudulent intent.”

Mr. Janangelo’s defense was that he was merely “utilizing the advantages of the tax law.” The Tax Court strongly disagreed:

“Mr. Janangelo did not ‘utilize the advantages of the tax law’ as he alleges; he intentionally and improperly attempted to reduce his taxable income by claiming deductions to which he knew he was not entitled and submitted documents that he knew were not accurate, thereby engaging in fraud on the tax system.”

The Court highlighted several facts that elevated his conduct from mere negligence to clear civil fraud:

Creation of a Sham Business: He fabricated a sole proprietorship spanning only a few hours in late December to improperly write off personal expenses that were no longer deductible under Section 67(g).
Fabrication of Records: He submitted a $14,500 billing statement to the IRS that did not match his attorney’s actual billing records of $4,500, which he had his attorney prepare based on numbers Mr. Janangelo himself provided.
Disregard of Prior Rulings: He claimed a substantial HSA-related deduction in 2019 despite having already lost a payroll collection action on the exact same plan for 2018, proving he knew the deduction was illegal when he filed his return.
Unprofessional Conduct: He was hostile and combative during the audits and Tax Court proceedings, filed frivolous motions, failed to appear at scheduled hearings, and violated a separate court order by filing sealed documents of an unrelated taxpayer in this record, claiming his own need for a continuance “outweighed the disclosure issue” under Section 6103.

As an experienced IRS revenue agent, licensed attorney, and CPA, Mr. Janangelo possessed extensive tax-specific knowledge and spent his career auditing other taxpayers for the exact same tax-avoidance behaviors. The Court concluded that his “misapplication of the tax laws cannot be fairly read as anything other than intentional” and sustained the 75% fraud penalty for all four years.

Negligence Penalty Relief for the Non-Service Spouse

While the Tax Court sustained the deficiencies and fraud penalties against Mr. Janangelo, it reached a different conclusion regarding Mrs. Janangelo. The IRS argued that Mrs. Janangelo should be held liable for Section 6662(a) accuracy-related penalties for negligence or substantial understatements of income tax, which were approved in the alternative to the fraud penalty.

Under Section 6664(c)(1), accuracy-related penalties will not be imposed on any portion of an underpayment if the taxpayer demonstrates “reasonable cause” and that they “acted in good faith.” Under Treasury Regulation Section 1.6664-4(b)(1), this determination is made on a case-by-case basis, taking into account all pertinent facts and circumstances, including reliance on a tax professional.

Under Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000), reliance on a tax professional provides a defense if the advisor was competent, the taxpayer provided accurate information, and the taxpayer actually relied in good faith.

Mrs. Janangelo testified that she had her returns professionally prepared prior to her marriage and routinely relied on her husband to handle the household finances and prepare their joint filings after they married. The Court found her reliance to be entirely reasonable:

“Although Mr. Janangelo displayed (both to us and to respondent) ample bad faith and an intent to avoid tax, it was reasonable for Mrs. Janangelo under the circumstances to rely on what her husband, a tax professional who was employed by the IRS, told her in preparing and filing their returns. Her reliance on him for the years before us is especially reasonable in light of the fact that all of the deductions at issue relate to Mr. Janangelo, his alleged business, and his litigation.”

Accordingly, the Court held that Mrs. Janangelo had established reasonable cause and good faith, sparing her from all Section 6662(a) penalties.

Crucial Practice Takeaways for CPAs and EAs

The decision in Janangelo v. Commissioner serves as a sobering case study for tax practitioners, delivering several vital lessons for our everyday practice:

Sophistication Changes the Burden of Persuasion: When representing highly educated clients, CPAs and EAs must realize that the IRS and the Tax Court will evaluate the client’s “intent” through the lens of their professional background. Standard excuses of “honest mistakes” or “misunderstanding the Code” are completely ineffective when a client holds a CPA, JD, or MBA (especially, as in this case, when the taxpayer holds all of them).
Strict Enforcement of Section 274(d): Spreadsheets, “workschedules,” or other self-prepared summaries are not substitutes for contemporaneous receipts, mileage logs, and documented business purposes. Practitioners must warn clients that the Cohan rule cannot rescue travel, transport, or listed property deductions.
The Danger of Sham Entities: Rebranding personal expenses as Schedule C business deductions to bypass the Section 67(g) suspension of miscellaneous itemized deductions is a high-risk strategy that the IRS is actively targeting. If an activity lacks an active, independent profit motive under Section 183, it must not be reported on Schedule C.
Tax Court Rules and Circular 230 Compliance: Under Tax Court Rule 33(b), an attorney’s or practitioner’s signature certifies that the pleadings are well-grounded in fact and warranted by existing law. Furthermore, under Circular 230 (31 C.F.R. Part 10), tax professionals have an ethical duty of due diligence and accuracy. Fabricating documents, ignoring prior litigation outcomes, or failing to verify billing records can lead to severe professional sanctions, as Mr. Kemp’s involvement and Mr. Janangelo’s ethical admonishments demonstrate.

Ultimately, Janangelo stands as a definitive warning: no taxpayer, regardless of their position or expertise, is above the law. Indeed, those who write, audit, or practice the tax law will find that their professional credentials only increase their exposure when they attempt to evade it.

Prepared with assistance from Gemini Notebook.