Frances Carlson v. United States, 754 F.3d 1223

Fran Carlson, a non-CPA tax preparer who worked for Jackson Hewitt, prepared roughly 1,200–1,500 returns over five years using firm software and limited training.
The IRS audited a sample of Carlson-prepared returns and found unsubstantiated deductions in 40 returns; the IRS assessed § 6701 penalties totaling $148,000; Carlson paid 15% and sued for a refund/determination.
The district court tried 27 penalties to a jury (13 conceded earlier by government); jury was instructed to apply the preponderance standard and found for the government on all counts.
Carlson moved for judgment as a matter of law as to several specific returns; district court denied; Carlson appealed both the jury-instruction (standard of proof) and sufficiency rulings.
The Eleventh Circuit held § 6701 requires proof of actual knowledge that a return understated tax (a scienter equivalent to fraud), so the government must prove violations by clear and convincing evidence.
The court also found insufficient evidence to sustain several of the specific penalties challenged by Carlson because the government produced only audit findings (errors) without evidence that Carlson actually knew returns understated tax; the court reversed on those items, vacated remaining judgment, and remanded for retrial under the correct standard.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Standard of proof for § 6701 penalties	§ 6701 requires proof by clear and convincing evidence because it requires actual knowledge (fraud-like scienter)	Preponderance of the evidence suffices	Clear and convincing standard applies; jury instruction using preponderance was error
Whether § 6701 is a fraud provision	§ 6701's knowledge element (knows return would cause understatement) embodies fraud and requires heightened proof	§ 6701 does not use "fraud" and should be treated as non-fraud civil penalty	Court: the statute's actual-knowledge element equates to fraud-like conduct; treat as fraud for burden-of-proof rules
Sufficiency of evidence re: specific penalties (multiple returns)	Government failed to prove Carlson actually knew returns understated tax; audit findings alone are insufficient	Audit findings and circumstantial evidence permit inference Carlson knew	Reversed as to listed returns — audit findings alone were insufficient; directed entry for Carlson on those penalties
Effect of erroneous jury instruction on remaining penalties	Instruction likely prejudiced Carlson because higher standard applies	Trial error harmless because evidence strong	Instruction was not harmless; vacated judgment on remaining penalties and remanded for new trial

Ballard v. Comm’r of Internal Revenue, 522 F.3d 1229 (11th Cir. 2008) (Commissioner must prove civil tax fraud by clear and convincing evidence)
Mattingly v. United States, 924 F.2d 785 (8th Cir. 1991) (discusses knowledge requirement under § 6701 and held preponderance standard for § 6701)
Barr v. United States, 67 F.3d 469 (2d Cir. 1995) (held preponderance applies to § 6701)
Grossman v. Comm’r of Internal Revenue, 182 F.3d 275 (4th Cir. 1999) (fraud in civil tax cases requires clear and convincing proof)
Marsellus v. Comm’r of Internal Revenue, 544 F.2d 883 (5th Cir. 1977) (fraud must be shown by clear and convincing evidence)