new tax act

Tax Court Has No Time for Frivolity

Oct 28th 2019
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Ever since the U.S. tax system was created, way back in 1913, some taxpayers have objected to paying their federal income tax liability. But simply refusing to pay tax hasn’t gotten anybody real far. Even worse, as shown in a new case, Wells, TC Memo 2019-134, 10/7/19, making  “frivolous” tax arguments can cost you penalties and interest, in addition to back taxes.

The list off those who have gone down this road before is practically endless. It includes tax professionals, con artists and regular people from all walks of life. Frequently, scammers will advertise special “tax loopholes” that don’t exist and encourage individuals to fight the IRS tooth and nail--to no avail.

Some of the arguments that have been previously been asserted in the courts are as follows:

  • Filing tax returns or paying income tax is voluntary.
  • The IRS must prepare your returns.
  • Wages and tips don’t constitute taxable income.
  • Taxes are only owed to the state of your residence.
  • Imposing tax is a violation of the First Amendment religious rights.
  • IRS summonses violate Fourth Amendment protections against search and seizure.
  • Requiring individuals to file tax returns is akin to slavery and is prohibited by the Thirteenth Amendment.

Finally, taxpayers have argued that they don’t owe any tax because they work for a private employer, not the federal government.

In the new case, a married couple who resided in Texas both had high-paying jobs with major corporations. They filed a joint Form 1040 for 2014 that reported zero wages and zero income, claimed the standard deduction and sought refunds for the full amounts of tax withheld from their paychecks. The couple attached their W-2s, reflecting the wage amounts and tax withholding, as well as 1099s for investments and other documents.

The taxpayers also attached to their return Forms 4852, Substitute for Form W-2, Wage and Tax Statement, indicating zero wages and the same amounts of tax withheld as was shown on each Form W-2. Each Form 4852 included the following statement:

“I am a private-sector worker, not an “employee” as defined in IRC 3401(c) and IRC 3121. I worked with a private-sector company, not a federal employer as defined in IRC 3401(d). I did not engage in “trade or business” as defined in USC Section 7701(a)(26).”

Naturally, the IRS didn’t buy this argument. It treated the couple’s 1040 as being invalid, froze the refund and assessed a frivolous tax return penalty of $5,000 against each spouse.

Now the Tax Court has sided with the IRS. Accordingly, it imposed the full amount of income tax the couple was liable for, plus interest and penalties. And, noting that it had already warned the couple about frivolous tax arguments in prior proceedings, the Court upped the ante on the frivolous tax penalty to $10,000.

Words to the wise: Caution your clients against pursuing this type of approach. There’s nothing to be gained and more money to be lost. They must accept paying tax as one of the financial realities of life in these United States. 

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