Small Business Taxes & Management

Special Report

Penalties for Pursuing Frivolous Tax Arguments


Small Business Taxes & ManagementTM--Copyright 2007, A/N Group, Inc.



The IRS has voiced its displeasure with taxpayers who maintain frivolous tax arguments to Congress. Congress has responded with several penalties which the IRS is ready to assess. The courts, too, have taken a dim view of taxpayers who go to the bar just as a delaying tactic. The discussion below outlines the penalties you could encounter for various actions and provides a list of positions the IRS has deemed to be frivolous arguments subject to an enhanced penalty. For additional details go to the IRS Web site at,,id=159932,00.html


Penalties for Frivolous Positions

Those who act on frivolous positions risk a variety of civil and criminal penalties. Those who adopt these positions may face harsher consequences than those who merely promote them. One Court said, “Like moths to a flame, some people find themselves irresistibly drawn to the tax protester movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like moths, these people sometimes get burned.”

Taxpayers filing returns with frivolous positions may be subject to the accuracy-related penalty under Section 6662 (20% of the underpayment attributable to negligence or disregard of rules or regulations) or the civil fraud penalty under Section 6663 (75% of the underpayment attributable to fraud) or the erroneous claim for refund penalty under Section 6676 (20% of the excessive amount). Additionally, late filed returns setting forth frivolous positions may be subject to an addition to tax under Section 6651(f) for fraudulent failure to timely file an income tax return (triple the amount of the standard failure to file addition to tax under Section 6651(a)(1)). The Tax Court has held that frivolous arguments may be indicative of fraud if made in conjunction with affirmative acts designed to evade paying federal income tax.

The Tax Relief Health Care Act of 2006 amended Section 6702 to allow imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous submissions other than returns, if the purported returns or specified submissions are either based upon a position identified as frivolous by the IRS in a published list or reflect a desire to delay or impede tax administration. The term specified submission means:

This amendment is effective for frivolous returns or specified frivolous submissions made after March 15, 2007, the publication date of Notice 2007-30, identifying the list of frivolous positions.

In the 1980s, Congress showed its concern about taxpayers misusing the courts and obstructing the appeal rights of others when it enacted tougher sanctions for bringing frivolous cases before the courts. Section 6673 allows the courts to impose a penalty of up to $25,000 when they come to any of three conclusions:

Taxpayers who rely on frivolous arguments may also face criminal prosecution for: (1) attempting to evade or defeat tax under section 7201, a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 5 years; or (2) making false statements on a return under Section 7206(1), a felony, for which the penalty is a fine of up to $250,000 and imprisonment for up to 3 years.

Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on such arguments may also face various penalties such as: (1) a $250 penalty under Section 6694 for each return prepared by an income tax return preparer who knew or should have known that the taxpayer’s argument was frivolous (or $1,000 for each return where the return preparer’s actions were willful, intentional or reckless); (2) a $1,000 penalty under Section 6701 for aiding and abetting an understatement of tax; and (3) criminal felony prosecution under Section 7206(2) for which the penalty is up to $250,000 and imprisonment for up to 3 years for assisting or advising about the preparation of a false return or other document under the internal revenue laws.

Further, promoters who fail to comply with court orders run the risk of incarceration for contempt of court. A tax scam promoter named James A. Mattatall was arrested for failing to provide list of the names, addresses, phone numbers, and Social Security numbers of his customers to the Justice Department per the court’s order. Also, a taxpayer named Charles D. Saunders was held in civil contempt, incarcerated and fined $250 a day until he complied with the court’s order directing him to fully comply with a summons from the IRS.


Frivolous Arguments

The Voluntary Nature of the Federal Income Tax System

  1. The filing of a tax return is voluntary
  2. Payment of tax is voluntary
  3. Taxpayers can reduce their federal income tax liability by filing a “zero return.”
  4. The IRS must prepare federal tax returns for a person who fails to file
  5. Compliance with an administrative summons issued by the IRS is voluntary

The Meaning of Income: Taxable Income and Gross Income

  1. Wages, tips, and other compensation received for personal services are not income
  2. Only foreign-source income is taxable
  3. Federal Reserve Notes are not income

The Meaning of Certain Terms Used in the Internal Revenue Code

  1. Taxpayer is not a “citizen” of the United States, thus not subject to the federal income tax laws
  2. The “United States” consists only of the District of Columbia, federal territories, and federal enclaves
  3. Taxpayer is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws
  4. The only “employees” subject to federal income tax are employees of the federal government

Constitutional Amendment Claims

  1. Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment
  2. Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment
  3. Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment
  4. Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment
  5. The Sixteenth Amendment to the United States Constitution was not properly ratified, thus the federal income tax laws are unconstitutional
  6. The Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens

Fictional Legal Bases

  1. The Internal Revenue Service is not an agency of the United States
  2. Taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act
  3. African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment
  4. Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime
  5. An “untaxing” package or trust provides a way of legally and permanently avoiding the obligation to file federal income tax returns and pay federal income taxes
  6. A “corporation sole” can be established and used for the purpose of avoiding federal income taxes


Copyright 2007 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536

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--Last Update 12/27/07