The Internal Revenue Service has issued a warning to taxpayers and tax preparers not to use frivolous tax arguments as a basis for not paying taxes.
Promoters of these schemes encourage taxpayers to make unreasonable and outlandish legal claims to avoid paying their taxes. The IRS reminds people that time and again, these arguments have been thrown out of court.
The use of these tax myths has earned a spot on this year’s IRS “Dirty Dozen” list, which spotlights the most common tax scams frequently seen during the tax filing season and beyond.
“Don’t be fooled by people citing dubious legal schemes to avoid paying taxes,” said IRS Commissioner Chuck Rettig. “Despite what con artists may tell you, there is no secret way to avoid paying what you legally owe. Taxpayers should be on the lookout for these and other common tax scams.”
In “The Truth about Frivolous Tax Arguments,” the IRS outlines some of the more common frivolous arguments, explains why they’re wrong and cites relevant court decisions. Examples of these common myths include:
- The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds;
- The only “employees” subject to federal income tax are those who work for the federal government;
- Only foreign-source income is taxable.
Perpetrators of illegal scams, as well as those who make use of them, can face possible criminal prosecution. The IRS Criminal Investigation division works closely with the Justice Department to shut down scams and prosecute the criminals behind them.
This Scheme Can Backfire
Not only will the use of a frivolous tax argument not allow filers to avoid paying taxes, it will actually make matters worse for the taxpayer. Besides risking criminal prosecution, taxpayers can also face a variety of civil penalties for engaging in these schemes.
Tops on the list is the $5,000 penalty for filing a frivolous tax return. The penalty applies to anyone who submits a frivolous tax return or other specified submissions, such as a request for a collection due process hearing, installment agreement, offer-in-compromise or taxpayer assistance order if any part of these submissions are based on a frivolous position.
But other penalties may also await the frivolous filer: they may be charged an additional 20 percent of the unpaid tax as an accuracy-related penalty; 20 percent of the excessive refund amount as an erroneous refund claim penalty; and a whopping 75 percent of the underpayment attributable to the fraud as a civil fraud penalty.
Late-filing and late-payment penalties could also be charged. And taxpayers who make frivolous tax arguments in court can also be charged an additional penalty by the Tax Court.
A list of more than 40 frivolous tax positions can be found in Notice 2010-33, 2010-17 I.R.B.609. The list is not all-inclusive, and the IRS and the courts may add to it at any time.