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The Truth About Frivolous Tax Arguments - Section III

MARCH 2014 Introduction  1  2 3 4  │  Print PDF

PENALTIES FOR PURSUING FRIVOLOUS TAX ARGUMENTS

Those who act on frivolous positions risk a variety of civil and criminal penalties.  Those who adopt these positions may face harsher consequences than those who merely promote them.  “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).

Taxpayers filing returns with frivolous positions may be subject to the accuracy-related penalty under section 6662 (twenty percent of the underpayment attributable to negligence or disregard of rules or regulations) or the civil fraud penalty under section 6663 (seventy-five percent of the underpayment attributable to fraud) or the erroneous claim for refund penalty under section 6676 (twenty percent of the excessive amount).  Additionally, late filed returns setting forth frivolous positions may be subject to an addition to tax under section 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 section 6651(a)(1)).  See Mason v. Commissioner, T.C. Memo. 2004-247, 88 T.C.M. (CCH) 398 (2004) (stating that 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 section 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.  Pub. L. No. 109-432, § 407(a), 120 Stat. 2922 (2006).  The term “specified submission” means: a request for a hearing under section 6320 (relating to notice and opportunity for hearing on filing of a notice of lien), a request for hearing under section 6330 (relating to notice and opportunity for hearing before levy), an application under section 6159 (relating to agreements for payment of tax liability in installments), an application under section 7122 (relating to compromises), or an application under section 7811 (relating to taxpayer assistance orders).  This amendment is effective for frivolous returns or specified frivolous submissions made after March 15, 2007, the release date of Notice 2007-30, 2007-1 C.B. 883, which identified the list of frivolous positions (last updated by Notice 2010-33, 2010-1 C.B. 609)

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.

“The purpose of § 6673 . . . is to induce litigants to conform their behavior to the governing rules regardless of their subjective beliefs.  Groundless litigation diverts the time and energies of judges from more serious claims; it imposes needless costs on other litigants.  Once the legal system has resolved a claim, judges and lawyers must move on to other things.  They cannot endlessly rehear stale arguments . . . . [T]here is no constitutional right to bring frivolous suits . . . . People who wish to express displeasure with taxes must choose other forums, and there are many available.”  Coleman v. Commissioner, 791 F.2d 68, 72 (7th Cir. 1986) (emphasis in original). 

A tax return preparer, as defined by section 7701(a)(36), who prepares any return or claim of refund with respect to which any part of an understatement of liability is due to an unreasonable position, including any frivolous position discussed in this outline, and who knew or reasonably should have known of the position may be required to pay a penalty equal to the greater of $1,000 or 50 percent of the income derived by the tax return preparer with respect to the preparation of the return or claim for refund.  I.R.C. § 6694(a).  The minimum penalty amount increases to $5,000 for willful or reckless conduct of the tax return preparer.  I.R.C. § 6694(b).  The IRS may impose a penalty of $1,000 for aiding or assisting in the preparation or presentation of any portion of a return with knowledge that it will result in an understatement of tax liability.  I.R.C. § 6701(a). 

Taxpayers who rely on frivolous arguments may also face criminal prosecution.   These taxpayers may be convicted of a felony for attempting to evade or defeat tax.  I.R.C. § 7201.  Section 7201 provides as a penalty a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 5 years.  Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.  I.R.C. § 7206(1).  The penalty for violating section 7206 is a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years.  Any individual found guilty of either offense may be subject to an increased fine of up to $250,000.  18 U.S.C. § 3571(b)(3). 

Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony for which the penalty is up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years for assisting with or advising about the preparation or presentation of a false return or other document under the internal revenue laws.  I.R.C. § 7206(2).   Any individual found guilty of a felony under section 7206 may be subject to an increased fine of up to $250,000.  18 U.S.C. § 3571(b)(3).   

Relevant Case Law:

Deyo v. United States, 296 F. App’x 157, 158 (2d Cir. 2008) – the court held that the IRS complied with any applicable personal approval requirement of section 6751 and upheld the assessment of penalties against a married couple for filing frivolous income tax returns, on which the taxpayers claimed zero adjusted gross income based on the frivolous position that they did not receive any income from sources listed in the regulations under section 861. 

Szopa v. United States, 460 F.3d 884, 887 (7th Cir. 2006) – the court found that a frivolous tax appeal warranted a presumptive sanction of $4,000, but imposed an $8,000 sanction against the taxpayer for repeatedly filing frivolous appeals.

Gass v. United States, 4 F. App’x 565 (10th Cir. 2001) – the court imposed an $8,000 penalty on the taxpayer for contending that taxes on income from real property are unconstitutional. 

Brashier v. Commissioner, 12 F. App’x 698 (10th Cir. 2001) – the court imposed $1,000 penalties on taxpayers who argued that filing sworn income tax returns violated their Fifth Amendment privilege against self-incrimination, after the Tax Court had warned them that their argument – rejected consistently for more than seventy years – was frivolous.

Baskin v. United States, 738 F.2d 975 (8th Cir. 1984) – the court found that the IRS’s assessment of a frivolous return penalty without a judicial hearing was not a denial of due process because there was an adequate opportunity for a later judicial determination of legal rights.

Jones v. Commissioner, 688 F.2d 17 (6th Cir. 1982) – the court found the taxpayer’s claim that his wages were paid in “depreciated bank notes” as clearly without merit and affirmed the Tax Court’s imposition of an addition to tax for negligence or intentional disregard of rules and regulations.

United States v. Rempel, 87 A.F.T.R.2d (RIA) 1810 (D. Ark. 2001) – the court warned the taxpayers of sanctions and stated: “It is apparent to the court from some of the papers filed by the Rempels that they have at least had access to some of the publications of tax protester organizations.”  The court went on to say, “The publications of these organizations have a bad habit of giving lots of advice without explaining the consequences which can flow from the assertion of totally discredited legal positions and/or meritless factual positions.”

Rowe v. United States, 583 F. Supp. 1516, 1520 (D. Del. 1984), aff’d, 749 F.2d 27 (3d Cir. 1984) – the court upheld the viability of section 6702 penalties against various objections, including that it was unconstitutionally vague because it does not define a “frivolous” return.  AFrivolous is commonly understood to mean having no basis in law or fact,” the court stated.

Other Cases:

Holker v. United States, 737 F.2d 751, 752-53 (8th Cir. 1984); McAfee v. United States, 2001-1 U.S.T.C. (CCH) ¶ 50,433 (N.D. Ga. 2001).

Sanctions Imposed Generally in Tax Court Cases:

Lee v. Commissioner, 463 F. App’x 236 (5th Cir. 2012) – the court affirmed the Tax Court’s sua sponte imposition of a $1,000 section 6673 penalty when the taxpayer had argued that the amounts shown on her Form 1099 were not taxable income, she was not a person subject to tax, and she was not involved in a trade or business.

Leyva v. Commissioner, 483 F. App’x 371 (9th Cir. 2012) – the court affirmed the Tax Court’s imposition of the section 6673 penalty against the petitioner after petitioner argued that the IRS was prohibited from collecting income tax from him because he had filed a Form 1040 reporting zero income.

Thomason v. Commissioner, 401 F. App’x 921 (5th Cir. 2010) – the court affirmed the Tax Court’s imposition of a $2,000 penalty against petitioner under section 6673 because petitioner made numerous frivolous arguments, including that the section 6020(b) substitute tax return prepared by the IRS was invalid and that United States citizens are exempt from paying income tax on income earned in the United States.

Tinnerman v. Commissioner, T.C. Memo. 2010-150 – the court imposed a $25,000 penalty under section 6673 in a CDP case for delaying the proceedings by making “stale and recycled” frivolous arguments. 

Precourt v. Commissioner, T.C. Memo. 2010-24 – against a background of eleven separate actions in which the taxpayer advanced frivolous arguments in both Tax Court and district court, as well as previous sanctions against the taxpayer of over $22,000, the Tax Court dismissed the taxpayer’s case and imposed the maximum penalty of $25,000 for failing to appear for court proceedings and for failing to comply with court orders.  In addition to petitioner’s dilatory conduct, his petition was plagued with frivolous constitutional and other claims.

McCammon v. Commissioner, T.C. Memo. 2008-114, 95 T.C.M. (CCH) 1421 (2008) – the court imposed a $25,000 sanction against a taxpayer who argued that she “did not have any income ‘in a constitutional sense,’” despite almost $200,000 paid to the taxpayer in her medical practice and despite being previously warned by the court against instituting meritless proceedings.

Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823 (2005), aff’d, 436 F.3d 533 (5th Cir. 2006) – the court imposed sanctions totaling $25,000 against the taxpayer for advancing arguments characteristic of tax-protester rhetoric that has been universally rejected by the courts, including arguments regarding the Sixteenth Amendment.  In affirming the Tax Court’s holding, the Fifth Circuit granted the government’s request for further sanctions of $6,000 against the taxpayer for maintaining frivolous arguments on appeal, and the Fifth Circuit imposed an additional $6,000 sanctions on its own, for total additional sanctions of $12,000.

Haines v. Commissioner, T.C. Memo. 2000-126, 79 T.C.M. (CCH) 1844, 1846 (2000) – stating that “[p]etitioner knew or should have known that his position was groundless and frivolous, yet he persisted in maintaining this proceeding primarily to impede the proper workings of our judicial system and to delay the payment of his Federal income tax liabilities,” the court imposed a $25,000 penalty.

Other Cases:

Rodriguez v. Commissioner, T.C. Memo. 2009-92, 97 T.C.M. (CCH) 1482 (2009); Rhodes v. Commissioner, T.C. Memo. 2008-225, 96 T.C.M. (CCH) 215 (2008); Hanloh v. Commissioner, T.C. Memo. 2006-194, 92 T.C.M. (CCH) 266 (2006).

Sanctions Imposed in Collection Due Process Cases:

Oropeza v. Commissioner, 402 F. App’x 221 (9th Cir. 2010) – the court affirmed the imposition of a $10,000 penalty on the taxpayer for raising frivolous and groundless arguments related to collection due process.

Goff v. Commissioner, 135 T.C. 231 (2010) – the court held that the IRS may proceed with collection of taxpayer’s unpaid taxes and penalties because the bonded promissory note she presented to the IRS did not constitute payment of her liabilities.  The court also held that her position was groundless and her arguments in support of the position were frivolous, and it imposed a $15,000 penalty against her under section 6673.

Pierson v. Commissioner, 115 T.C. 576, 581 (2000) – the court considered imposing sanctions against the taxpayer, but decided against doing so, stating, “we regard this case as fair warning to those taxpayers who, in the future, institute or maintain a lien or levy action primarily for delay or whose position in such a proceeding is frivolous or groundless.”

Other Cases:

Burke v. Commissioner, 124 T.C. 189 (2005); Roberts v. Commissioner, 118 T.C. 365 (2002), aff’d, 329 F.3d 1224 (11th Cir. 2003); Battle v. Commissioner, T.C. Memo. 2009-171, 98 T.C.M. (CCH) 45 (2009); Oropeza v. Commissioner, T.C. Memo. 2008-94, 95 T.C.M. (CCH) 1367 (2008), aff’d, 402 F. App’x 221 (9th Cir. 2010); Hassell v. Commissioner, T.C. Memo. 2006-196, 92 T.C.M. (CCH) 273 (2006).

Sanctions Imposed Against Taxpayer’s Counsel:

Powell v. Commissioner, T.C. Memo. 2009-174, 98 T.C.M. (CCH) 56 (2009) – the court imposed sanctions against the taxpayer in the amount of $25,000 and against the taxpayer’s attorney in the amount of $4,725 for making frivolous arguments and delaying the proceedings.

Wetzel v. Commissioner, T.C. Memo. 2005-211, 90 T.C.M. (CCH) 266 (2005) – the court imposed a $15,000 penalty against Wetzel, a professional tax return preparer, for making frivolous arguments because he knew or should have known the arguments were frivolous.

Takaba v. Commissioner, 119 T.C. 285, 295 (2002) – the court rejected the argument that income received from sources within the United States is not taxable income, stating that “[t]he 861 argument is contrary to established law and, for that reason, frivolous” and imposed sanctions of $10,500 against the taxpayer’s attorney, as well as sanctions of $15,000 against the taxpayer, for making such groundless arguments.

The Nis Family Trust v. Commissioner, 115 T.C. 523, 545-46 (2000) – concluding that the petitioners chose “to pursue a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax-protester arguments,” the court imposed a $25,000 penalty against them, and also imposed sanctions of more than $10,600 against their attorney for arguing frivolous positions in bad faith.

Edwards v. Commissioner, T.C. Memo. 2002-169, 84 T.C.M. (CCH) 24, 42 (2002), aff’d, 119 F. App’x 293 (D.C. Cir. 2005) – the court found that sanctions were appropriate against both the taxpayer and the taxpayer’s attorney for making groundless arguments and stated that “[a]n attorney cannot advance frivolous arguments to this Court with impunity, even if those arguments were initially developed by the client.”  In a supplemental opinion, the court imposed sanctions against the taxpayer in the amount of $24,000 and against the taxpayer’s attorney in the amount of $13,050.  Edwards v. Commissioner, T.C. Memo. 2003-149, 85 T.C.M. (CCH) 1357.

 

Relevant Case Law:

Deyo v. United States, 296 F. App’x 157, 158 (2d Cir. 2008) – the court held that the IRS complied with any applicable personal approval requirement of section 6751 and upheld the assessment of penalties against a married couple for filing frivolous income tax returns, on which the taxpayers claimed zero adjusted gross income based on the frivolous position that they did not receive any income from sources listed in the regulations under section 861. 

Szopa v. United States, 460 F.3d 884, 887 (7th Cir. 2006) – the court found that a frivolous tax appeal warrants a presumptive sanction of $4,000, but imposed an $8,000 sanction against the taxpayer for repeatedly filing frivolous appeals.

Gass v. United States, 4 F. App’x 565 (10th Cir. 2001) – the court imposed an $8,000 penalty for contending that taxes on income from real property are unconstitutional. 

Brashier v. Commissioner, 12 F. App’x 698 (10th Cir. 2001) – the court imposed $1,000 penalties on taxpayers who argued that filing sworn income tax returns violated their Fifth Amendment privilege against self-incrimination, after the Tax Court had warned them that their argument – rejected consistently for more than seventy years – was frivolous.

Baskin v. United States, 738 F.2d 975 (8th Cir. 1984) – the court found that the IRS’s assessment of a frivolous return penalty without a judicial hearing was not a denial of due process because there was an adequate opportunity for a later judicial determination of legal rights.

Jones v. Commissioner, 688 F.2d 17 (6th Cir. 1982) – the court found the taxpayer’s claim that his wages were paid in “depreciated bank notes” as clearly without merit and affirmed the Tax Court’s imposition of an addition to tax for negligence or intentional disregard of rules and regulations.

United States v. Rempel, 87 A.F.T.R.2d (RIA) 1810 (D. Ark. 2001) – the court warned the taxpayers of sanctions and stated: “It is apparent to the court from some of the papers filed by the Rempels that they have at least had access to some of the publications of tax protester organizations.”  The court went on to say, “The publications of these organizations have a bad habit of giving lots of advice without explaining the consequences which can flow from the assertion of totally discredited legal positions and/or meritless factual positions.”

Rowe v. United States, 583 F. Supp. 1516, 1520 (D. Del. 1984) – the court upheld the viability of section 6702 penalties against various objections, including that it was unconstitutionally vague because it does not define a “frivolous” return.  AFrivolous is commonly understood to mean having no basis in law or fact,” the court stated.

Other Cases:

Holker v. United States, 737 F.2d 751, 752-53 (8th Cir. 1984); McAfee v. United States, 2001-1 U.S.T.C. (CCH) ¶ 50,433 (N.D. Ga. 2001).

Sanctions Imposed Generally in Tax Court Cases:

Thomason v. Commissioner, 401 F. App’x 921 (5th Cir. 2010) – the court affirmed the Tax Court’s imposition of a $2,000 penalty against petitioner under section 6673 because petitioner made numerous frivolous arguments, including that the section 6020(b) substitute tax return prepared by the IRS was invalid and that United States citizens are exempt from paying income tax on income earned in the United States.

Tinnerman v. Commissioner, T.C. Memo. 2010-150 – the court imposed a $25,000 penalty under section 6673 in a CDP case for delaying the proceedings by making “stale and recycled” frivolous arguments. 

Precourt v. Commissioner, T.C. Memo. 2010-24 – against a background of eleven separate actions in which the petitioner advanced frivolous arguments in both Tax Court and district court, as well as previous sanctions against the petitioner of over $22,000, the Tax Court dismissed the petitioner’s case and imposed the maximum penalty of $25,000 for failing to appear for court proceedings and for failing to comply with court orders.  In addition to petitioner’s dilatory conduct, his petition was plagued with frivolous constitutional and other claims.

McCammon v. Commissioner, T.C. Memo. 2008-114, 95 T.C.M. (CCH) 1421 (2008) – the court imposed a $25,000 sanction against a petitioner who argued that she “did not have any income ‘in a constitutional sense,’” despite almost $200,000 paid to the petitioner in her medical practice and despite being previously warned by the court against instituting meritless proceedings.

Stearman v. Commissioner, T.C. Memo. 2005-39, 89 T.C.M. (CCH) 823 (2005), aff’d, 436 F.3d 533 (5th Cir. 2006) – the court imposed sanctions totaling $25,000 against the taxpayer for advancing arguments characteristic of tax-protester rhetoric that has been universally rejected by the courts, including arguments regarding the Sixteenth Amendment.  In affirming the Tax Court’s holding, the Fifth Circuit granted the government’s request for further sanctions of $6,000 against the petitioner for maintaining frivolous arguments on appeal, and the Fifth Circuit imposed an additional $6,000 sanctions on its own, for total additional sanctions of $12,000.

Haines v. Commissioner, T.C. Memo. 2000-126, 79 T.C.M. (CCH) 1844, 1846 (2000) – stating that “[p]etitioner knew or should have known that his position was groundless and frivolous, yet he persisted in maintaining this proceeding primarily to impede the proper workings of our judicial system and to delay the payment of his Federal income tax liabilities,” the court imposed a $25,000 penalty.

Other Cases:

Rodriguez v. Commissioner, T.C. Memo. 2009-92, 97 T.C.M. (CCH) 1482 (2009); Rhodes v. Commissioner, T.C. Memo. 2008-225, 96 T.C.M. (CCH) 215 (2008); Hanloh v. Commissioner, T.C. Memo. 2006-194, 92 T.C.M. (CCH) 266 (2006).

Sanctions Imposed in Collection Due Process Cases:

Oropeza v. Commissioner, 402 F. App’x 221 (9th Cir. 2010) – the court affirmed the imposition of a $10,000 penalty on the taxpayer for raising frivolous and groundless arguments related to collection due process t

Goff v. Commissioner, 135 T.C. 231 (2010) – the court held that the IRS may proceed with collection of petitioner’s unpaid taxes and penalties because the bonded promissory note she presented to the IRS did not constitute payment of her liabilities.  The court also held that her position was groundless and her arguments in support of the position were frivolous, and it imposed a $15,000 penalty against her under section 6673.

Pierson v. Commissioner, 115 T.C. 576, 581 (2000) – the court considered imposing sanctions against the petitioner, but decided against doing so, stating, “we regard this case as fair warning to those taxpayers who, in the future, institute or maintain a lien or levy action primarily for delay or whose position in such a proceeding is frivolous or groundless.”

Other Cases:

Battle v. Commissioner, T.C. Memo. 2009-171, 98 T.C.M. (CCH) 45 (2009);Oropeza v. Commissioner, T.C. Memo. 2008-94, 95 T.C.M. (CCH) 1367 (2008); Hassell v. Commissioner, T.C. Memo. 2006-196, 92 T.C.M. (CCH) 273 (2006); Burke v. Commissioner, 124 T.C. 189 (2005); Roberts v. Commissioner, 118 T.C. 365 (2002), aff’d, 329 F.3d 1224 (11th Cir. 2003).

Sanctions Imposed Against Taxpayer’s Counsel:

United States v. Jones, No. 4:09-cv-00547-EJL, 2011 WL 2680742 (D. Idaho Jul. 7, 2011) – the court permanently enjoined a tax return preparer from preparing tax returns for others and promoting frivolous tax schemes as a result of her repeated use of the Form 1099-OID scheme on behalf of her clients. 

Abdo v. United States, 234 F. Supp. 2d 553 (M.D.N.C. 2002), aff’d, 63 F. App’x 163 (4th Cir. 2003) – the court found that a tax return preparer who prepared returns based on the arguments that wages are not taxable because labor is exchanged for wages and that wages are exempt from income tax as a result of withheld FICA tax should be permanently enjoined from acting as an income tax return preparer and from other related activities. 

Powell v. Commissioner, T.C. Memo. 2009-174, 98 T.C.M. (CCH) 56 (2009) – the court imposed sanctions against the petitioner in the amount of $25,000 and against the petitioner’s attorney in the amount of $4,725 for making frivolous arguments and delaying the proceedings.

Wetzel v. Commissioner, T.C. Memo. 2005-211, 90 T.C.M. (CCH) 266 (2005) – the court imposed a $15,000 penalty against Wetzel, a professional tax return preparer, for making frivolous arguments because he knew or should have known the arguments were frivolous.

Takaba v. Commissioner, 119 T.C. 285, 295 (2002) – the court rejected the argument that income received from sources within the United States is not taxable income, stating that “[t]he 861 argument is contrary to established law and, for that reason, frivolous” and imposed sanctions of $10,500 against the petitioner’s attorney, as well as sanctions of $15,000 against the petitioner, for making such groundless arguments.

Edwards v. Commissioner, T.C. Memo. 2002-169, 84 T.C.M. (CCH) 24, 42 (2002) – the court found that sanctions were appropriate against both the petitioner and the petitioner’s attorney for making groundless arguments and stated that “[a]n attorney cannot advance frivolous arguments to this Court with impunity, even if those arguments were initially developed by the client.”  In a supplemental opinion, the court sanctioned the petitioner $24,000 and the attorney $13,050. Edwards v. Commissioner, T.C. Memo. 2003-149, 85 T.C.M. (CCH) 1357.

Nis Family Trust v. Commissioner, 115 T.C. 523, 545-46 (2000) – the court, concluding that the petitioners chose “to pursue a strategy of noncooperation and delay, undertaken behind a smokescreen of frivolous tax-protester arguments,”  imposed a $25,000 penalty, and also imposed sanctions of more than $10,600 against their attorney for arguing frivolous positions in bad faith.

 



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