Veronica filed her 20x4 federal income tax return on June 20, 20x5. She had not applied for an extension of time to file. The return reported gross income of $80,000, and a tax liability of $16,000. Her employer had withheld $9,000 in federal income tax. She did not pay any additional amounts in tax either prior to or with the filing of the return.

Veronica also had $16,000 of income from consulting work unrelated to her job. The company that had engaged her as a consultant had sent her a Form 1099 reporting the income, but it had been lost in the mail and never received. She forgot about the income and didn't report it. The additional tax on the income would be $3,200.

The return reported a contribution of antiques (capital gain property) to a local section 501(c)(3) organization. The antiques were to be sold by the donee charity. The antiques were worth $4,000, but Veronica "fudged" on the value, and took a $10,000 deduction. The additional tax based on the correct value would be $1,200.

She also sold some business property for $100,000. She had purchased it years ago for $90,000 and had taken depreciation deductions over the years, leaving her with an adjusted basis of $40,000. But on her return, she used the cost, $90,000, as the adjusted basis and reported a gain of $10,000. If she had used the correct adjusted basis, her additional tax would have been $10,000.

Her return had been prepared by a good friend, Archie, who was a CPA. He had prepared her returns for years. He knew that the correct adjusted basis of the property was $40,000, but went along with using the original cost, $90,000, as the adjusted basis for computing the gain, to save taxes for Veronica. Archie suggested making a disclosure of the basis issue on the return, along with a statement arguing that $90,000 was the correct adjusted basis for this purpose, but Veronica rejected his idea.

Veronica also took a depreciation deduction in the amount of $4,000 on her automobile, based on an alleged business use. In fact, however, her claim of business use was subject to substantial question. In addition, she had failed to keep records of any kind in support of the business use, contrary to the IRS rules for substantiating the business use of a vehicle. The additional tax would be $600.

The IRS conducted an examination of Veronica's 20x4 tax return. The Revenue Agent who conducted the examination proposed deficiencies in tax on account of the foregoing in the amount of slightly more than $15,000.

Veronica engaged Archie to represent her in the examination. Archie advised her that the Agent would likely propose additions to tax as well as the deficiency in tax.

1. What defenses does Veronica have?
2. What is the IRS's burden with respect to the additions?
3. What is Veronica's burden?