Frivolous Tax Arguments And Their Perils

“Like moths to a flame, some people find themselves irresistibly drawn to the tax protester movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like moths, these people sometimes get burned.” United States v. Sloan, 939 F.2d 499, 499-500 (7th Cir. 1991).

As long as the federal income tax has been with us, taxpayers have tried to argue that income taxes don’t legally apply to them. The reasons and bases for these arguments usually include the voluntary nature of the federal income tax system, the meaning of income, and the meaning of certain terms contained in the Interenal Revenue Code. Taxpayers hanging their hats on frivolous positions risk a variety of civil and criminal penalties for tax evasion and tax fraud . And taxpayers that adopt these frivolous positions may face more severe consequences than those who only promote them.

Indeed, the federal income tax system is voluntary. Thus some taxpayers contend that the filing of a tax return is voluntary. A further contention is that the payment of federal income tax is voluntary. Some taxpayers argue that by simply filing by filing a “zero return,” they reduce their federal income tax liability. Two even more absurd arguments made by taxpayers for trying to avoid paying taxes are: (i) that the IRS must prepare federal tax returns for a person who fails to file and (ii) compliance with an administrative summons issued by the IRS is voluntary.

Taxpayers often argue with the IRS over what constitues income. They often contend that wages, tips, and other compensation received for personal services are not income. Or that military retirement pay does not constitute income. Some argue that only foreign-source income is taxable. Others that Federal Reserve Notes are not income.

The IRS often deals with taxpayers who contest the the meaning of certain terms used in the Internal Revenue Code. One such argument is that a taxpayer is not a “citizen” of the United States or “person,” and thus is not subject to the federal income tax laws. Or that the only “employees” subject to federal income tax are employees of the federal government. Another absurd contention is that the “United States” consists only of the District of Columbia, federal territories, and federal enclaves.

Taxpayers who rely on frivolous arguments to avoid filing returns may be subject to an addition to tax under § 6651(a)(1) for failing to file a return. Additionally, taxpayers who rely on frivolous arguments to avoid paying taxes may be subject to additions to tax under § 6651(a)(2) and § 6654 for failing to pay taxes.

Also, returns filed based upon frivolous positions may subject filers to the accuracy-related penalties under § 6662 (twenty percent of the underpayment attributable to negligence or disregard of rules or regulations), the civil fraud penalty under § 6663 (seventy-five percent of the underpayment attributable to fraud) and the erroneous claim for refund penalty under § 6676 (twenty percent of the excessive amount).

Additionally, late filed returns setting forth frivolous positions may be subject to an addition to tax under § 6651(f) for fraudulent failure to timely file an income tax return (triple the amount of the standard failure to file addition to tax under § 6651(a)(1)). Mason v. Commissioner, T.C. Memo. 2004-247, 88 T.C.M. (CCH) 398 (2004) (frivolous arguments “may be indicative of fraud if made in conjunction with affirmative acts designed to evade paying federal income tax”).

The Tax Relief Health Care Act of 2006 amended § 6702 to allow imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous submissions other than returns, if the purported returns or specified submissions are either based upon a position identified as frivolous by the IRS in a published list or reflect a desire to delay or impede tax administration.

Section 6673(a) allows the Tax Court to impose a penalty of up to $25,000 when it appears that:
• a taxpayer instituted or maintained a proceeding primarily for delay;
• a taxpayer’s position in such proceeding is frivolous or groundless; or
• a taxpayer unreasonably failed to pursue administrative remedies.

If you have questions about whether a position you are taking related to the filing of your taxes may be considered frivolous by the IRS, call THE TAX EXPERTS at the Thorgood Law Firm For a FREE consultation call 212-490-0704.
Frivolous Tax Arguments and their Perils

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