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Frivolous Tax Arguments

Tax and Financial News

December 2012

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Frivolous Tax Arguments

  • Only employees of the federal government are subject to income tax.
  • Wages and tips as compensation for services are not taxable.
  • The filing of a tax return is voluntary.
  • Only foreign-source income is taxable.
  • Federal Reserve Notes are not income.

These are some of the many arguments used by tax protesters to justify their failure to file or pay federal income taxes. The theories are varied and often creative, but the results are not: the failure to properly file and pay federal income tax will result in civil penalties, criminal convictions and jail time.

Actor Wesley Snipes did not file a tax return from 1999 to 2001 despite earning more than $38 million in those years, according to prosecutors. He tried to rely on the so-called “861 argument” from the tax denier movement, which holds that wages are not listed as taxable in section 861 of the Internal Revenue Code. However, the argument has never succeeded in the courts. He was convicted of three misdemeanor willful failure to file charges in 2010 and celebrated his 50th birthday in prison in Pennsylvania last summer.

Snipes is one of many who have fallen victim to the claims of promoters of such schemes. The IRS can bring criminal charges against promoters who encourage people to adopt frivolous tax positions, including tax lawyers, accountants and organizers of tax protests, but taxpayers who adopt these frivolous tax positions often face harsher penalties than those who promote them. In Snipes’ case, however, the mastermind behind the scheme was sentenced to 10 years.

Snipes allegedly relied on several of the tax denier arguments. Prosecutors claimed that he filed claims for tax refunds of more than $11 million for 1996 and 1997 and sent three worthless “bills of exchange” in the amount $14 million as tax payments. After being indicted, Snipes sent a letter in which he claimed he was a non-resident alien of the United States and therefore not subject to its tax laws.

With the proliferation of the Internet and YouTube, more and more people are exposed to tax deniers’ claims and many fall under their tantalizing spell. But relying on the advice of others is not a defense, as Snipes learned the hard way.

The penalties the IRS has at its disposal are numerous. On the civil side, they start with an accuracy-related penalty (20 percent of an underpayment) and become progressively more serious. The civil fraud penalty is 75 percent of an underpayment. There is an erroneous claim for refund penalty of 20 percent of the excessive amount. Late-filed returns with frivolous positions are subject to the fraudulent failure to file a timely return penalty (triple the amount of the standard failure to file) and there is a $5,000 penalty for other frivolous submissions to the IRS. In addition, the Tax Court can impose a $25,000 penalty if a taxpayer institutes a proceeding primarily as a delay tactic.

The IRS can also instigate criminal proceedings. It is a felony to attempt to evade a tax or to willfully sign a return or other document that the taxpayer does not believe to be correct. Penalties include six-figure fines and three to five years imprisonment.

Nobody likes to pay their income tax, but there are plenty of quality tax professionals who can legally help to minimize your tax burden. Don’t end up like Wesley Snipes. If you are presented with a tax position that sounds too good to be true, it probably is. 

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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