It is fair to say that most people would probably prefer not to be labeled a tax protester. And yet it seems like an appropriate term for someone who denies the IRS’s authority to tax them. So why is it then, in 1998, the U.S. Congress prohibited the IRS from calling individuals “illegal tax protesters?” In fact, tax lawyers say the lawmakers went so far as to instruct the agency to purge its’ “protester” code from the computer files of approximately 57,000 American citizens.
As you might expect, however, “old habits die hard” and, according to a new report recently released by the Treasury Inspector General for Tax Administration, IRS employees often continue to use the name in case summaries. The report goes on to suggest the continued use of “illegal tax protester” and/or similar appellations can have the effect of stigmatizing taxpayers and causing the Agency’s employees to be jaded against them.
But as the ole sayin’ goes: “a rose by any other name still smells as sweet.” So no matter what they may be called, tax attorneys say folks who opt to assert positions the IRS regards as frivolous tax arguments may end-up owing big. How big you ask? IRS tax attorneys say it means a twenty percent (20%) penalty (Internal Revenue Code, Section 6662) and a huge seventy five percent (75%) civil fraud penalty (Internal Revenue Code, Section 6663) if the IRS concludes you’ve asserted a frivolous position.
But the punishments for asserting a frivolous tax argument don’t stop there. If you have unfiled returns (which most “tax protesters” typically do) and you then decide to file a late tax return with a frivolous position, the IRS is entitled to triple your penalty for fraudulent failure to timely file and income tax return (see Internal Revenue Code, Section 6651(f)) and impose a seventy five percent (75%) penalty. But there are still other penalties as well. Tax lawyers say the IRS could also add a $5,000 penalty for submitting a frivolous tax return (see Internal Revenue Code, Section 6702) and you might even be separately penalized for submitting what appears to be an innocent tax form.
So how do you know if your tax argument is frivolous or not? IRS tax attorneys point out the Agency publishes its own list for those who are uncertain whether their positions may be deemed “frivolous” (see IRS Notice 2007-30 which is available for review on the Agency’s website). Examples of frivolous conduct include false arguments that wages are not taxable income and claiming that the requirements to file a tax return and pay taxes are voluntary.
For those die hard “tax protesters” who take their frivolous arguments to Court the reception isn’t any friendlier. Courts have repeatedly ordered thousands of dollars in fines against taxpayers and their tax lawyers for pursuing frivolous cases. And the Courts may order an additional penalty (up to $25,000) for asserting a frivolous position. What’s more, many who assert frivolous tax positions are referred to the U.S. Department of Justice for criminal prosecution. So in the immortal words of Sergeant Phil Esterhaus from old television series, Hill Street Blues, “hey, let’s be careful out there.”
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