Frivolous Tax Returns

The IRS can charge penalties of $5,000 for Frivolous Tax Returns and other Frivolous submissions made to the IRS. The US Tax Court may impose penalties of up to $25,000 when a Taxpayer makes frivolous arguments in Tax Court. A list of some of the frivolous arguments that can lead to penalties is found here. You can also read more about the tax court penalty here. These arguments include opinions such as the tax laws being voluntary (one could only wish!) or that tax laws are unconstitutional.

It is true there are some gray areas of the law. Judges disagree amongst themselves on how to interpret or apply the law. That is not to say there are arguments that are clearly legal and clearly illegal. Just because we can argue somebody who kills another person in the middle of chaotic bar room brawl was acting in self-defense, it does not mean we can argue Jeffrey Dahmer did nothing illegal.

In the area of tax law, some arguments such as the Internal Revenue Code being unconstitutional or tax laws being illegal are deemed frivolous because no judge or anybody with a scintilla of tax law knowledge would take these arguments seriously. These arguments are the tax law equivalent of saying “Jeffrey Dahmer did nothing illegal.” Again, the IRS and Tax Court may impose fines on taxpayers making these frivolous arguments.

In this age of disinformation, more and more people are getting exposed to frivolous tax law arguments on social media. It is quite easy for a normal, well-adjusted person to fall down a tax protester rabbit hole. We offer the following red flags to help spot potential tax scams.

1. IRS Notice 2010-13.
You come across a person that offers some interesting tax advice. Of course, nobody likes paying taxes and it is quite reasonable for everyone to do everything they legally can do to minimize their tax burden. IRS Notice 2010-13 lists many of the arguments deemed to be frivolous and potentially expose a taxpayer to penalties. Does the advice received resemble anything covered within IRS Notice 2010-13? If so, avoid this tax advice at all costs!

2. The Law Applies to You.
If you live in the United States, the laws of the United States (including the Internal Revenue Code) apply to you. You cannot opt out of the tax laws by reciting some “magic words” or declaring yourself a citizen of no country or some other country. Among other things, this means you must pay tax (with very few limited exceptions) on all the income you earn. This also means you need to file a tax return reporting all the income you earn from sources such as wages, business profits, stock sales, rental properties, crypto currency, etcetera.

3. Too Good to Be True?
Is this person’s advice too good to be true? Paying taxes is normal. For better or for worse, virtually every person that participates in the economy in some way must pay some sort of tax. Somebody suggesting that you can avoid paying taxes altogether is frivolous.

4. Billionaire Tax Secrets.
There are people online who talk about sharing “billionaire tax secrets.” While Warren Buffet was not out of line when he famously pointed out he pays a lower tax rate than his secretary, the type of tax planning somebody like Warren Buffet would employ is not going to be practical for the average person. People like Warren Buffet and multi-national corporations have complex business structures that require hundreds of hours of work from accountants and attorneys to create and maintain.

At RJS LAW, we help good people with tax problems. We fight for our clients, but we fight fair, and we make sure the IRS and other tax agencies fight fair as well. We offer tax planning services based on the Internal Revenue Code, case law, and other authorities recognized by the courts. If you need tax planning or tax advice from an experienced and ethical law firm, give us a call at 619-595-1655 for a free consultation.

Written by Joseph Cole, Esq., LL.M.

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