There are dozens of urban legends floating around cyberspace suggesting that the IRS cannot force most Americans to file and pay taxes. I personally recognize the apparent legitimacy of some of those arguments – they look and sound accurate. Was the 16th Amendment to the Constitution properly ratified? Who knows?
There are sound reasons to question many of the interpretations of the tax code. Unfortunately, we do not have final say on how are laws are interpreted. That right belongs to the court and the courts routinely reject these arguments. Right or wrong, the court has the last word.
What does that mean for folks who elect to follow some of these “creative” strategies? It usually means a hefty bill for back taxes, interest and penalties. Some taxpayers also face the ultimate sanction for their position. Prison.
Congress allows the IRS to impose significant monetary penalties for taxpayers who take “frivolous” tax positions. Of course, what the IRS considers frivolous may be far different than what the taxpayer believes. Once again, the taxpayer doesn’t get the last word.
Taxpayers filing returns with frivolous positions face an accuracy related penalty (Internal Revenue Code sec. 6662) of 25% of any underpayment. In more serious case, the IRS can assert a fraud penalty (sec. 6663) of 75% of the underpayment.
The penalties don’t stop there. The IRS can add an additional $5000 penalty for taking a frivolous position (Tax Relief Health Care Act of 2006).
If you take your frivolous position to court, the court can add an additional $25,000 penalty for positions that are frivolous or instituted primarily for delay.
Ultimately, taking a frivolous position may get one prosecuted for tax evasion (punishable by 5 years in prison and a $250,000 fine) or filing a false return (3 year felony).
The rub in all of these penalties and sanctions is that the IRS or court determines what is frivolous.
What does the IRS consider frivolous? According to information released from the IRS on March 4th, 2011, any of the following beliefs and positions could get you in deep trouble with the IRS:
- Filing a tax return is voluntary.
- Payment of taxes is voluntary.
- It’s okay to file a “zero” return.
- Compliance with an IRS summons is voluntary.
- Wages and tips are not taxable income.
- Taxpayers are not citizens of the U.S.
- Taxpayers can invoke religious grounds to avoid paying.
- Our right against self-incrimination protects us from having to file returns.
- The 16th Amendment to the Constitution was never ratified.
- The IRS is not an agency of the U.S.
- One can create a trust to avoid taxes.
- IRS assessments are unenforceable unless personally signed by the Treasurer.
This is just a small sample of what the IRS contends is frivolous.
Unfortunately, there are many self – professed “gurus” on the Internet that offer packages detailing how people can “legally” avoid paying taxes. Some charge huge fees for their advice or services and some falsely tell stories about how they avoided taxes by use of their system.
Don’t believe them. These promoters have duped many an honest taxpayer.
For many years the IRS sent out a publication (Publication 1) to those who tried to take a frivolous position on their return. While well intended, the publication as very thin on details and no match for the detailed “legal opinions” often offered by those in the tax freedom movement.
The good news is that the IRS has published a detailed legal explanation of the various arguments that have been attempted and what the court has says about each. Hopefully, this guidance will prevent some folks from learning a very expensive lesson. In some cases, the new 84 page document will at least help people make an informed decision of the risks they take by joining the tax freedom movement.
A copy of the document is available from the IRS through this link.
What should you do if you have already taken a frivolous position? The safest course of action is to quickly amend your return and fix any errors. Voluntarily correcting your return before getting caught almost always means no prosecution and a better chance of avoiding huge penalties. If you are worried about criminal exposure, contact a good criminal tax lawyer to help you come into compliance. Mahany & Ertl can certainly help you.