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Frivolous
Tax Arguments
FS-2004-12, March 2004
To help people filling out their tax forms avoid a variety of scams,
schemes and errors, the Internal Revenue Service has made several
guidance documents available on this Web site.
Some of the errors are clearly frivolous positions that taxpayers
may take in either a misguided or deliberate attempt to impede the
government’s tax administration function. These can leave
a person facing taxes, interest and penalties, and in some cases,
criminal prosecution. The IRS is concerned that some people may
be victims of con artists and promoters who sell these schemes and
then leave the taxpayers to fend for themselves when the IRS catches
them.
Some errors are not evident on the face of the return, but may
be discovered later when the IRS matches payment documents with
the recipients’ returns, or audits returns for particular
items. For example, a taxpayer may fail to report wages, interest
or dividend income. When the IRS later matches the payment records
from employers, banks, brokerages, etc., and finds the omission,
it notifies the taxpayer about the proposed additional tax, plus
interest and any applicable penalty.
Still other mistakes are “math errors” — things
that are obviously wrong and that the IRS has the authority to correct
as it processes the returns. For example, a taxpayer may list an
incorrect Social Security number (SSN) for a dependent, enter the
wrong tax amount, or claim the Earned Income Tax Credit when the
return shows no earned income. The IRS can deny the dependent’s
exemption amount until the taxpayer provides the correct SSN, change
an incorrect tax amount, or remove an improperly claimed tax credit.
Among the new IRS documents cautioning taxpayers about errors and
schemes are:
The
Truth about Frivolous Tax Arguments
This Web-published document briefly but substantively addresses
false arguments about the legality of not paying taxes or filing
returns. It lays out the assertions and provides a summary of the
law and relevant legal decisions involving these false claims. The
IRS Chief Counsel’s office prepared the original text in 2001
and has updated it each year since, adding new case citations and
expanding the number of arguments addressed to 21. This year, a
separate section was created to address 16 additional frivolous
arguments that have been made in Collection Due Process cases.
There are links to the document from “The Newsroom”
section’s “What’s Hot” and “Scams/Consumer
Alerts” pages, the “Tax Pro News” and the “Topics
for Individuals” pages of the IRS Web site.
The Truth about
Frivolous Tax Arguments (PDF 405K).
Revenue Rulings
The IRS has issued eight rulings dealing with specific frivolous
positions. These present authoritative legal guidance for taxpayers
and preparers who may encounter the false positions in promotional
materials or news accounts. The rulings deal with frivolous arguments
known by these names:
The Dirty Dozen
News Release IR-2004-26 focuses on the 12 schemes that the IRS
has seen most frequently in the past year. The IRS had issued various
warnings about individual schemes over the years and grouped them
into a list in 2001. The next year, it expanded the list to 12 and
has updated it annually.
Among the Dirty
Dozen are the misuse of trusts, “claim of right”
and “corporation sole” returns, offshore transactions,
“Section 861” employment tax schemes and improper claims
for the Disabled Access Credit.
Warning Lists
The IRS recently issued two notices warning taxpayers about specific
errors to avoid:
-
Notice
2004-22 (PDF 103K) lists frivolous positions that
taxpayers have recently been taking on their returns. These
lack any foundation in law and taxpayers asserting them on a
return may incur a $500 penalty. Those who pursue such frivolous
arguments before the Tax Court face a penalty of up to $25,000.
-
Notice
2004-13 (PDF 73K) lists both common math errors
that the IRS corrects during processing as well as mistakes
that it usually discovers later. Taxpayers can avoid refund
delays and follow-up letters by filing accurate returns.
