The ability of the U.S. government to tax its citizens is well established. But taxpayers continue to contest taxation of wages and other earnings in the courts. As shown by a recent case, Jagos, T.C. Memo. 2017-202, 10/16/17, this usually leads to penalties and interest, on top of the regular income tax that is owed.
Typically, tax protesters will refuse to pay the taxes they owe on the basis of a constitutional freedom or because tax payments are voluntary or some other reason such as taxes being a form of theft. Naturally, the IRS won’t go along, and the courts have backed up the nation’s tax collection agency to the hilt. Nevertheless, that doesn’t stop taxpayers from trying.
The results are inevitable. In rare cases, the tax protester will end up in prison, but more often than not they will face a hefty bill for back taxes, interest and penalties. The IRS also may assert its right to directly garnish wages paid by an employer.
In addition to facing an uphill climb on this issue, taxpayers often experience frustration, hassles and additional costs for their efforts.
In the new case, a couple received more than $544,000 in investment earnings from various investments in 2012, including almost $520,000 from Fidelity. On their 2012 return, they reported zero taxable income and claimed a refund of $98,387, the amount withheld by Fidelity from payments the financial institutional made to them. Subsequently, the IRS audited the couple and issued a notice of deficiency.
The couple filed a petition for redetermination to the Tax Court in 2016. In their petition, they argued that none of the income they received was taxable and that the notice of deficiency was invalid because the IRS had no first-hand knowledge of the income giving rise to the deficiency. They also protested that the IRS failed to prepare a substitute for return, thereby violating the tax law, and that they aren’t liable for any penalties.
At trial, the couple reiterated the arguments in their petition. They also requested an opportunity to submit written briefs following the trial. The Court allowed this but encouraged them to abandon arguments that had been repeatedly rejected in court. The couple and assured the Court that the brief would be no more than 15 pages. However, the brief they submitted was more than 70 pages long, and they failed to abandon the well-worn tax-protester arguments that have consistently been rejected.
End result: The couple conceded that they received the income and failed to offer any credible evidence or meritorious legal arguments that it was not taxable. Accordingly, the Tax Court sustained the deficiency determined by the IRS, the accuracy-related penalty and the frivolous argument penalty.
Do your best to dissuade clients from going down this road. The eventual outcome in any other case isn’t likely to change.