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 who rely on frivolous arguments to avoid filing returns may be subject to an addition to tax under section 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 sections 6651(a)(2) and 6654 for failing to pay taxes.
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), the civil fraud penalty under section 6663 (seventy-five percent of the underpayment attributable to fraud) and 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, 2010-17 I.R.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.
Courts provide a forum for litigation of taxpayers’ bona fide disputes with the IRS. The courts’ ability to perform that function is impeded when a taxpayer files a petition for some other reason, such as to defy the law or to delay the inevitable. Consequently, Congress gave court’s discretion to impose penalties on taxpayers who engage in such conduct, in order to deter frivolous litigation and to induce taxpayers to conform their conduct to settled principles of law before pursuing litigation. Courts may impose a section 6673 penalty on its own, even if the IRS does not make a motion for sanctions. Leyshon v. Commissioner, T.C. Memo 2015-104, 109 T.C.M. (CCH) 1535 (2015). “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 penalty under section 6673 may be assessed against the taxpayer even when the taxpayer relied on the advice of an attorney. Best. V. Commissioner, T.C. Memo. 2014-72, 107 T.C.M. (CCH) 1376 (2014).
Taxpayers who appeal a decision on frivolous grounds may be subject to sanctions under Rule 38 of the Federal Rules of Appellate Procedure. Sanctions may include single or double costs and damages to appellee. Courts have “sounded a cautionary note to those who would persistently raise arguments against the income tax which have been put to rest for years. The full range of sanctions in Rule 38 hereafter shall be summoned in response to a totally frivolous appeal.” Crain v. Commissioner, 737 F.2d 1417, 1418 (5th Cir. 1984).
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 preparing 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:
Graffia v. Commissioner, 114 A.F.T.R.2d (RIA) 2014-6415 (7th Cir. 2014) – the 7th Circuit, characterizing the appellant’s arguments as frivolous, affirmed the Tax Court and warned the appellant that further frivolous appeals would result in sanctions under Federal Rules of Appellate Procedure Rule 38.
Jacobsen v. Commissioner, 551 F. App’x 950 (10th Cir. 2014) – the appellant argued that federal income tax is an excise tax on privileged activities; the 10th Circuit upheld the imposition of a penalty under I.R.C. § 6673(a) for making frivolous arguments and also a penalty under I.R.C. § 6662(d).
Worsham v. Commissioner, 531 F. App’x 310 (4th Cir. 2013) – the 4th Circuit upheld the Tax Court’s imposition of a penalty under I.R.C. § 6651(f) for fraudulent failure to file a return, relying on the numerous frivolous arguments the taxpayer made along with other indicia of fraud.
Baskin v. United States, 738 F.2d 975 (8th Cir. 1984) – the 8th Circuit 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 6th Circuit 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.
Rowe v. United States, 583 F. Supp. 1516 (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. Frivolous is commonly understood to mean having no basis in law or fact,” the court stated.
Curtis v. Commissioner, T.C. Memo. 2013-12, 105 T.C.M. (CCH) 1100 (2013) – the court held that the taxpayer was liable for an I.R.C. § 6651(f) fraudulent failure to file penalty and found that the taxpayer’s activities in making and promoting frivolous tax arguments “demonstrate a clear intent to evade the assessment and collection of tax” and the court imposed a $25,000 fine under I.R.C. § 6673(a)(1).
Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014) – the court upheld the imposition of penalties under I.R.C. §§ 6651(f), 6651(a)(2), 6654 and imposed a $25,000 penalty under I.R.C. § 6673 for each of the taxpayer’s consolidated cases.
Other Cases: Buckardt v. Commissioner, 548 F. App’x 433 (9th Cir. 2013); 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:
Balice v. Commissioner, 634 F. App'x 349, 350 (3d Cir. 2016), cert. denied, 137 S. Ct. 136, 196 L. Ed. 2d 105 (2016) – the 3rd Circuit affirmed the Tax Court’s imposition of a $25,000 section 6673 penalty against a taxpayer who made the “patently frivolous” arguments that (1) the Constitution does not authorize an income tax; (2) the 16th Amendment lacks an enactment clause; (3) only residents of Washington, D.C., and other federal enclaves are subject to the federal tax laws; (4) Congress cannot delegate the enforcement of the tax laws to the executive; (5)
the United States cannot tax the fruits of Balice's fundamental right to work; (6) the United States may tax only the profit Balice earns after subtracting the value of his labor; and (7) tax liabilities are assessed against only “withholding agents,” not individuals.
Curtis v. Commissioner, 648 F. App'x 689, 690 (9th Cir. 2016) – the 9th Circuit affirmed the Tax Court’s imposition of a $25,000 section 6673 penalty for taking frivolous positions regarding the constitutionality and mandatory nature of income taxes.
Young v. Commissioner, 551 F. App’x 229 (5th Cir. 2014) – the 5th Circuit upheld a $25,000 sanction the Tax Court imposed on the taxpayer and, in addition, imposed an $8,000 penalty under Federal Rules of Procedure Rule 38 on the taxpayer for bringing a frivolous appeal.
Lee v. Commissioner, 463 F. App’x 236 (5th Cir. 2012) – the 5th Circuit 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 9th Circuit affirmed the Tax Court’s imposition of the section 6673 penalty against taxpayer after he 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 5th Circuit affirmed the Tax Court’s imposition of a $2,000 penalty against taxpayer under section 6673 because he 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.
Boggs v. Commissioner, 569 F.3d 235 (6th Cir. 2009) – the 6th Circuit affirmed the Tax Court’s imposition of a penalty under section 6673 against a taxpayer who made the frivolous argument that wages are not taxable income and imposed an additional penalty of $8,000 for making a frivolous appeal under Federal Rules of Appellate Procedure Rule 38.
Deyo v. United States, 296 F. App’x 157, 158 (2d Cir. 2008) – the 2nd Circuit 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 7th Circuit 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 10th Circuit 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 10th Circuit 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.
United States v. Rempel, 87 A.F.T.R.2d 2001-1810 (D. Alaska 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 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.”
Nitschke v. Commissioner, T.C. Memo. 2016-78, 111 T.C.M. (CCH) 1356 ( 2016) –noting that the court had imposed penalties on petitioners on multiple occasions for raising frivolous arguments, the court imposed a penalty of $10,000 under I.R.C.§ 6673.
Waltner v. Commissioner, T.C. Memo. 2014-133, 108 T.C.M. (CCH) 6 (2014) – the court imposed a penalty of $10,000 under I.R.C. § 6673 and upheld the addition to tax under I.R.C. § 6651.
Hill v. Commissioner, T.C. Memo. 2013-264, 106 T.C.M. (CCH) 586 (2014) – the court imposed a penalty of $20,000 against a taxpayer who made the “frivolous and groundless arguments” that (1) he is not a person statutorily made liable for the income tax, (2) the income tax is an excise tax, (3) he did not have income within the meaning of the Sixteenth Amendment, and (4) the income tax does not apply to the receipts of all American citizens.
Precourt v. Commissioner, T.C. Memo. 2010-24, 99 T.C.M. (CCH) 1112 (2010) – 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 him of over $22,000, the Tax Court dismissed his 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 his 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 her 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) – court imposed a $25,000 penalty, stating, “[Taxpayer] 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.”
Other Cases: Duggan v. Commissioner, T.C. Memo. 2014-17, 107 T.C.M. (CCH) 1099 (2014); Heger v. United States, 114 Fed.Cl. 204 (2014); Hill v. Commissioner, T.C. Memo. 2013-265, 106 T.C.M. (CCH) 590 (2014); 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 9th Circuit 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.
Tinnerman v. Commissioner, T.C. Memo. 2010-150, 100 T.C.M. (CCH) 20 (2010) – 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.
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: Best. V. Commissioner, T.C. Memo. 2014-72, 107 T.C.M. (CCH) 1376 (2014); 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).
Sanctions Imposed Against Taxpayer’s Counsel:
May v. Commissioner, T.C. Memo 2016-43, 111 T.C.M. (CCH) 1179 (2016), aff'd sub nom. Best v. Commissioner, 702 F. App'x 615 (9th Cir. 2017) – the court imposed $7,188 of sanctions against the taxpayers’ attorney for multiplying proceedings “unreasonably and vexatiously.”
Waltner v. Commissioner, T.C. Memo. 2014-133, 108 T.C.M. (CCH) 6 (2014) – the court imposed sanctions on the taxpayers and ordered their counsel to show cause why the court should not impose on him excessive costs under I.R.C. section 6673.
Powell v. Commissioner, T.C. Memo. 2009-174, 98 T.C.M. (CCH) 56 (2009) – the court imposed $25,000 of sanctions against the taxpayer and $4,725 against his attorney 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.
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 taxpayer and his 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 taxpayer $24,000 and the attorney $13,050. Edwards v. Commissioner, T.C. Memo. 2003-149, 85 T.C.M. (CCH) 1357.
The Nis Family Trust v. Commissioner, 115 T.C. 523, 545-46 (2000) –the court, concluding that the taxpayers 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.