Don't Mess With Taxes

Nothing ever disappears on the internet. Even, or especially, tax related posts.

Take the bad legal take on taxes that tops this post. It was retweeted on Sunday (Dec. 11) by, you guessed it, Bad Legal Takes. But there's no indication of when Dave Champion originally blasted out his bad tax advice.

It might have been before he was barred by a federal court in 2012 from promoting a tax fraud scheme. Or maybe he's back, since this Tweet apparently went up in October. His books also are still for sale online.

Either way, that item this weekend spurred a fun exchange among some #TaxTwitter folks, kicked off by Joe Kristan and soon attracting comments from Matt Foreman, Kimberly DeCarrera (who pointed out Champion's run-in with the Justice Department), and yes, moi.

As you've by now figured out, folks who focus on taxes professionally look askance at those who advocate what the Internal Revenue Service calls frivolous tax arguments. They're also often referred to by a more prosaic name: tax scams.

So, after enjoying the tweets, I took Kimberly's observation — "I see a blog post coming soon..." — to heart.

Frivolous tax arguments are no fun: While one synonym for frivolous is merry, these false and unreasonable claims that are used to file fraudulent tax returns, or not file at all, have no place in this festive month. Or any time of year.

And the IRS is serious about going after folks who promote or use frivolous tax arguments. It has a list, updated most recently back in April, of these unfounded tax arguments. When taxpayers are found to have used them, they can face significant penalties.

The ill-founded anti-tax arguments that the IRS frowns upon include —

• Paying income tax is voluntary.
• Wages are not taxable income.
• Taxpayers are citizens of specific states, not U.S. citizens, and are therefore exempt from federal income tax laws.
• Taxpayers can refuse to pay taxes on religious or moral grounds.
• The federal income tax laws are unconstitutional.

Wrong, wrong, wrong, wrong, and wrong. And those are just among the most popular frivolous tax arguments. You can check out the official debunking of them and more at IRS.gov's The Truth About Frivolous Tax Arguments page.

Paying for wasting IRS time: Also at least thumb through the page discussing the penalties, both civil and criminal, for pursuing frivolous tax arguments.

You'll have to pay the tax you evaded by using the frivolous argument, along with the penalties and interest charges the IRS will tack on to the amount.

Here's a quick overview of those amounts:

• The failure-to-file penalty is 5 percent of unpaid taxes per month.
• The failure-to-pay penalty is 0.5 percent of unpaid taxes per month.
• Accuracy-related penalties of 20 percent of underpaid tax.
• Civil fraud penalties of 75 percent of unpaid taxes.
• Erroneous refund claim penalty of 20 percent of the over-claimed amount.
• Fraudulent failure-to-file penalty of 15 percent per month.

Even more can add up: Then there are some special charges allowed by various pieces of legislation.

The Tax Relief Health Care Act of 2006 amended the tax code to allow for a $5,000 penalty for frivolous tax returns and for specified frivolous submissions other than returns.

The U.S. Tax Court also has been granted the ability to impose a penalty of up to $25,000 when it appears that a taxpayer has — 

• instituted or maintained a proceeding primarily for delay;
• maintained a position in such a proceeding that is frivolous or groundless; or
• unreasonably failed to pursue administrative remedies.

This added monetary punishment was deemed appropriate by Congress since frivolous tax arguments clog up the Tax Court docket and impede its real purpose of litigating taxpayers' bona fide disputes with the IRS.  

As the 2015 Tax Court memo Leyshon v. Commissioner noted —

"Groundless litigation diverts the time and energies of judges from more serious claims; it imposes needless costs on other litigants. Once the legal system has resolved a claim, judges and lawyers must move on to other things. They cannot endlessly rehear stale arguments. … [T]here is no constitutional right to bring frivolous suits. … People who wish to express displeasure with taxes must choose other forums, and there are many available."

Finally, don't forget the interest. When the final bill is totaled after the frivolous tax argument is disallowed, this charge, compounded daily, will increase the due amount. The applicable IRS interest rates are adjusted quarterly. The latest inflation-affected amount goes to 7 percent per year on Jan. 1, 2023.

Aiding and abetting is costly, too: A tax return preparer who completes and submits any return or refund claim, any part of which is due to an understatement of legally due tax based on an unreasonable (including frivolous) position may face a penalty equal to the greater of $1,000 or 50 percent of the income the preparer got for handling the frivolous return.

This minimum penalty amount increases to the greater of $5,000 or 75 percent of the preparer's income from the filing if it is determined to be willful or reckless.

Then there's jail: If the frivolous tax arguments go too far, then the IRS will move from civil prosecution to criminal action.

Taxpayers who are convicted on frivolous argument felony criminal charges could face a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 5 years.

Similarly, taxpayers convicted of a felony for, in the IRS' words, "willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter" — this is what you do when you sign your Form 1040 — also could face a fine of up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years.

Plus, any individual found guilty of either offense may be subject to an increased fine of up to $250,000.

And, going back to the Tweet that started this post, tax law says —

"Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony for which the penalty is up to $100,000 ($500,000 in the case of a corporation) and imprisonment for up to 3 years for assisting with or advising about the preparation or presentation of a false return or other document under the internal revenue laws."

So be wary of tax arguments, especially those pushed out on any of the many social media platforms, that offer ways to avoid taxes that sound too good to be true. They probably are.

And the taxes they purport you can avoid aren't worth the trouble you'll find yourself in if you fall for them.

You also might find these items of interest:

• Missouri man gets 8 years for $335M fraud, $615K tax schemes
• Pay your taxes or pay penalties, too, which will go up in 2023 due to inflation
• IRS-Criminal Investigation tax crime efforts pay off domestically and globally in FY22

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