Taxpayer Advocate Report on Friv Pen Litigation

[jcolvin2]

Analysis of Litigated Cases

We analyzed 49 opinions issued between June 1, 2008, and May 31, 2009 that addressed the
IRC § 6673 penalty. Thirty-four of these opinions were issued by the Tax Court and 15 were
issued by U.S. Courts of Appeals on appeals brought by taxpayers who sought review of
the Tax Court’s imposition of the penalty. Notably, the Courts of Appeals sustained the Tax
Court position in all 15 cases. A detailed list of all cases appears in Table 6 of Appendix III.
In 28 cases, the Tax Court imposed penalties under IRC § 6673, with the amounts ranging
from $1,000 to the maximum of $25,000. We identified only three cases that involved business
taxpayers (i.e., a corporation, partnership, trust, or a taxpayer filing a Form 1040, U.S.
Individual Income Tax Return, with a Schedule C, E, or F). Three taxpayers were represented
by attorneys; all others appeared pro se. The taxpayers in these cases presented a wide
variety of arguments that the courts have generally rejected on numerous occasions. Upon
encountering these arguments, the courts almost invariably cited the language set forth in
Crain v. Commissioner:

We perceive no need to refute these arguments with somber reasoning and copious
citation of precedent; to do so might suggest that these arguments have some colorable
merit. The constitutionality of our income tax system – including the role played within that system by the Internal Revenue Service and the Tax Court – has long been
established.14

In the cases we reviewed, taxpayers raised the following issues that the Tax Court has
deemed frivolous and consequently were subject to a penalty under IRC § 6673(a)(1) (or,
in some cases, the court warned that such arguments were frivolous and could lead to a
penalty in the future if the taxpayers maintained the same frivolous positions):

■■ Citizens of certain states are not subject to income taxes: At least four taxpayers
argued that as residents of various “sovereign,” “compact,” or “independent” states, they
are not subject to income taxes imposed by the United States government.15

■■ IRS forms and notices violate the Paperwork Reduction Act because they do not
display a valid Office of Management and Budget (OMB) Control Number: In at
least five cases, taxpayers argued the IRS forms and notices they received violated the
Paperwork Reduction Act (PRA).16 Under the PRA, OMB is given authority to review
an agency collection of information and to assign a control number to each collection
of information it approves.17 If a collection of information does not display a current
control number or fails to state that the request for information is not subject to the
PRA, the PRA provides that a person cannot be subject to a penalty for the failure to
maintain or provide information.18 These taxpayers argued that because certain IRS
forms and notices do not contain OMB control numbers, the PRA protects them from
any penalties for failure to comply with the IRS’s request for information. The courts
have consistently rejected such arguments.19

■■ Only income earned from the United States government is taxable: Taxpayers in at
least five cases presented arguments that only federal government employees or those
who earn income from the United States government are subject to the income tax.20

■■ Constitutional arguments: At least three taxpayers argued that the income tax
violates their constitutional rights, they are not citizens as defined by the 14th or 16th
Amendments, or that the 16th Amendment as a whole is unconstitutional.21

Conclusion

Taxpayers in the cases analyzed this year presented the same arguments raised and
repeated year after year, which the courts routinely and universally reject.22 The taxpayer
avoided the IRC § 6673 penalty in only four of the cases where the IRS requested the
penalty, demonstrating the willingness of the courts to impose a penalty when the taxpayer
makes frivolous arguments or institutes a case merely for delay. Where the IRS has not
requested the penalty, the court may raise the issue sua sponte and in many cases imposes
the penalty or cautions the taxpayer that similar future behavior will result in a penalty.23
Finally, the U.S. Courts of Appeals have shown their willingness to uphold the penalties
imposed by the Tax Court without fail in the cases analyzed for the period between June 1,
2008, and May 31, 2009, and will often impose further appellate-level sanctions on taxpayers
who assert frivolous arguments.

14 Crain v. Comm’r, 737 F.2d 1417, 1417-18 (5th Cir. 1984).
15 See, e.g., Cobin v. Comm’r, T.C. Memo. 2009-88.
16 See, e.g., Schneller v. Comm’r, T.C. Memo. 2008-196. See also Ford v. Pryor, 552 F.3d 1174 (10th Cir. 2008), aff’g U.S. v. Ford, 514 F.3d 1047 (D.N.M.
2007).
17 44 U.S.C. §§ 3502, 3504, 3507(a).
18 44 U.S.C. § 3512.
19 See U.S. v. Dawes, 951 F.2d 1189, 1191-93 (10th Cir. 1992) (citations omitted).
20 See, e.g., Wagenknecht v. Comm’r, T.C. Memo. 2008-288, appeal docketed, No. 09-1355 (6th Cir. Mar. 24, 2009).
21 See, e.g., Cummings v. Comm’r, T.C. Memo. 2008-184, appeal filed, No. 08-2472 (6th Cir. Oct. 8, 2008).
22 See, e.g., National Taxpayer Advocate 2008 Annual Report to Congress 533-36.
23 See, e.g., Cobin v. Comm’r, T.C. Memo. 2009-88.

See Table 6 as the following link:

http://www.irs.gov/pub/irs-utl/5_09_tas ... ndices.pdf

[Lambkin]

So do the 49 cases represent a sample or is that all of the friv pens issued during that 1-year period?

[jcolvin2]

Not sure. My guess is that it is a complete - or almost complete - set, but I haven't cross-checked it.

[silversopp]

I hope it's just a sample. Only 49 in that time period seems awfully low considering the number of TPs out there. I understand that the government has limited resources, but when the majority of the TPs are getting away with their various scams, it really does look like the gurus are correct. That just snowballs into more TPs using the scam.

[Nikki]

The Tax Court web site yielded the following results from its "Opinions Search" function:
(note - the function does not allow for a date range)

The search was for all opinions which contained the text "6673"

All of 2008 -- 44 opinions
All of 2009 -- 38 opinions

Just because 6673 was referenced in the opinion doesn't mean that the penalty was imposed.

However, the Advocate's office examined cases over a one-year period and found 49 opinions which addressed 6673. 49 is reasonably close to the two-year average of 41 (above).

Looks like it's not a sample, but the full set.

[bmielke]

I hope it's just a sample. Only 49 in that time period seems awfully low considering the number of TPs out there. I understand that the government has limited resources, but when the majority of the TPs are getting away with their various scams, it really does look like the gurus are correct. That just snowballs into more TPs using the scam.

Well these are just tax court cases not IRS Friv. Penalities so there were likely many more IRS Penalities then Tax Court Sanctions.

[Demosthenes]

I would imagine that the number of court cases will increase, now that the friv pen increase from $500 to $5,000 is kicking in.

[Pantherphil]

What I would like to know is how many of these penalties and sanctions are actually collected. Easy for the IRS or the Tax Court or the Court of Appeals to assess and order them to be paid, not necessarily so easy to bring the cash into the treasury.

Looking at the protracted procedural history of these cases and the ability of the taxpayer to spin out the process for years and years through administrative appeals, Tax Court Petitions, appeals to the Circuits, internal due process appeals of threatened collection activities, and futher Court appeals from administrative due process hearing, how much of these delinquent taxes are actually collected?

I ask because in my work assisting low income taxpayers with IRS problems, my experience has been that the bureaucracy spins a lot of wheels sending out threatening notices and demands and holding telephonic conferences but actually collects very little tax and penalties.

My experience with offer in compromise and settlement proposals is that the IRS rejects the taxpayer's offer to pay something and ends up getting nothing. My personal impression only-- your mileage may vary.

[LPC]

I was curious as to why this report was prepared by the Taxpayer Advocate because it didn't seem to be making any recommendations or expressing any opinion.

The report is part of the 2008 Annual Report of the Taxpayer Advocate, and I found the answer to my question in the introduction to the section of the executive summary dealing with "most litigated tax issues":

"Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate
to identify the ten tax issues most often litigated in the federal courts and to classify those
issues by the category of taxpayer affected. The cases we reviewed were decided during the
12 months that began on June 1, 2007, and ended on May 31, 2008."

Frivolous litigation penalties ranked #9 on the top ten list. Maybe next year we can improve that ranking.

[Quixote]

I was curious as to why this report was prepared by the Taxpayer Advocate because it didn't seem to be making any recommendations or expressing any opinion.

The report is part of the 2008 Annual Report of the Taxpayer Advocate, and I found the answer to my question in the introduction to the section of the executive summary dealing with "most litigated tax issues":

"Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate
to identify the ten tax issues most often litigated in the federal courts and to classify those
issues by the category of taxpayer affected. The cases we reviewed were decided during the
12 months that began on June 1, 2007, and ended on May 31, 2008."

Frivolous litigation penalties ranked #9 on the top ten list. Maybe next year we can improve that ranking.

jcolvin2's post was taken from the National Taxpayer Advocate's 2009 Annual Report to Congress . Frivolous issues penalties ranked #6 on 2009's top ten list.

[Dezcad]

I was curious as to why this report was prepared by the Taxpayer Advocate because it didn't seem to be making any recommendations or expressing any opinion.

The report is part of the 2008 Annual Report of the Taxpayer Advocate, and I found the answer to my question in the introduction to the section of the executive summary dealing with "most litigated tax issues":

"Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(X) requires the National Taxpayer Advocate
to identify the ten tax issues most often litigated in the federal courts and to classify those
issues by the category of taxpayer affected. The cases we reviewed were decided during the
12 months that began on June 1, 2007, and ended on May 31, 2008."

Frivolous litigation penalties ranked #9 on the top ten list. Maybe next year we can improve that ranking.

jcolvin2's post was taken from the National Taxpayer Advocate's 2009 Annual Report to Congress . Frivolous issues penalties ranked #6 on 2009's top ten list.

From that 2009 Annual Report, Footnote 5 of "the Most Litigated Issues: Introduction Section":

Frivolous issues penalty cases rose from the ninth ranking in 2008 to the sixth
ranking in 209 with an increase of cases from 49 cases in 2008 to 62 cases in 2009.