Many tax laws might be absurd, but overall, taxes are no laughing matter, especially when it comes to filers who use frivolous tax arguments.
The Internal Revenue Service defines frivolous tax arguments as misinterpretations or disregard of tax laws in order to evade paying taxes or claim refunds to which they aren't entitled. To date, the IRS has identified 50 frivolous tax arguments used by taxpayers.
And those improper refunds have cost the U.S. Treasury -- and responsible taxpayers -- more than $27.2 million.
Millions claimed for frivolous reasons: That's how much, according to a recently released Treasury Inspector General for Tax Administration (TIGTA) report, in potentially erroneous refunds or tax credits based on frivolous arguments that the IRS sent to 1,938 taxpayers in just one tax year, 2014.
When TIGTA considered returns filed during fiscal years 2012 through 2014, investigators discovered a total of 36,648 tax returns in which filers used one or more of the known frivolous tax arguments.
Frivolous returns slipping through: Specifically, TIGTA found that under its current processes and procedures, the IRS cannot ensure that it will catch all frivolous tax arguments.
Part of the problem, according to TIGTA, is IRS employees who are not adequately trained to identify tax returns that claim frivolous tax arguments.
For example, while the IRS has developed two online frivolous return training courses, employees working in units most likely to identify frivolous returns and correspondence are not required to take the training courses.
In addition, TIGTA found that in some cases employees in the IRS Frivolous Return Program (FRP) Correspondence Unit incorrectly marked correspondence containing potentially frivolous arguments as material that should be destroyed.
Suggested changes: TIGTA recommended that the IRS ensure that its annual evaluation of the electronic filters used to catch returns using frivolous tax arguments be adjusted to include identification and assessment of all original and amended tax returns, regardless of dollar amount, that meet the filter criteria.
TIGTA also suggested that the IRS correct computer programming errors, as well as ensure that all employees receive annual training on the processes for identifying potentially frivolous tax returns.
Making frivolous filers pay up: As for those 1,938 returns that were confirmed as using frivolous arguments, TIGTA says the IRS needs to go after these filers. The IRS can assess a $5,000 penalty for each of the frivolous filings.
In addition to the penalty for submitting a frivolous tax filing, the law allows for a variety of other penalties, including those related to a return's accuracy, a civil fraud penalty, an erroneous refund claim penalty and a failure to file penalty.
The Tax Court may also impose a penalty up to $25,000 against taxpayers who make frivolous arguments in court.
And taxpayers who use frivolous tax arguments also could face:
- Criminal prosecution for attempting to evade or defeat the tax they owe, which carries a maximum individual taxpayer penalty of $100,000 and imprisonment for up to five years; and
- Charges of willful failure to file a return, for which the maximum individual taxpayer fine is $25,000 and also could include imprisonment for up to a year.
Changes being made: IRS management agreed with TIGTA's recommendations, and told the tax agency oversight investigators that its FRP filters have been modified to ensure that it will catch future returns that earlier slipped through.
As for those almost 2,000 frivolous returns that produced improper refunds, the IRS says they will be referred to the FRP for additional review.
"It is important that every American obligated to pay taxes does so," said J. Russell George, Treasury Inspector General for Tax Administration. "I am pleased that the IRS agreed to the changes we recommended."
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