What do Wesley Snipes, Mike Sorrentino, Ja Rule, Darryl Strawberry, Chuck Berry, Richard Hatch, Pete Rose, Leona Helmsley, and Martha Stewart all have in common? That's right. They've all gone to jail for tax evasion. Many of them attempted to use what the IRS refers to as “frivolous tax arguments”. Most of us have heard of these from time to time, but were too afraid to try them out. However, in certain circles, usually those consisting primarily of libertarians and/or conspiracy theorists, people really, truly believe in these arguments and actually stop paying their taxes.
Approximately 600 people per year are jailed for tax evasion. On average, these folks are 52 years old, white (52%), male (69%), US Citizens (93%), with little or no prior criminal history living in Illinois, California, or New York, and serve an average jail time sentence for tax-evasion of 17 months.
I mistakenly assumed none of my readers would believe in these arguments, so I was surprised to see a comment get posted on the blog a while back.
Amazingly, the doctor signed his name to the comment (and I was easily able to determine where he practiced and note he has had some other run ins with the law and his medical board). Aside from jail time, just filing a return based on a frivolous tax argument is punishable by a fine of $5,000. And it's not just returns according to the IRS ‘Dirty Dozen' scams list:
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.
Tax Avoidance vs Evasion
Before we get too much further into this, I just want to remind you that we're talking about tax evasion here, not tax avoidance. The definition of tax evasion is fraudulently avoiding the payment of tax that you legitimately owe. Tax avoidance is living your life in such a way that you owe less tax. Make sure you can differentiate between tax evasion and tax avoidance. Tax avoidance is NOT illegal, as Judge Learned Hand wrote years ago:
Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.
The IRS List of Frivolous Tax Arguments
This problem has become so common that back in 2014, the IRS actually published a list of frivolous tax arguments. It has also been very clear that this is not a comprehensive list, merely a list of examples. However, if your argument that you don't have to pay taxes is on this list, you can be quite certain what you are doing is illegal and, if caught, will result in fines and potentially even jail time. There are forty arguments on this list, divided into several categories. Here they are, with some comments about each category.
The Voluntary Nature of the Federal Income Tax System
- The filing of a tax return is voluntary.
- Payment of federal income tax is voluntary.
- Taxpayers can reduce their federal income tax liability by filing a “zero return”.
- The IRS must prepare federal tax returns for a person who fails to file.
- Compliance with an administrative summons issued by the IRS is voluntary.
No, taxes are mandatory. Perhaps you've heard the phrase, “Nothing in life is certain, except death and taxes”. There's a reason taxes are put in the same category as death.
The Meaning of Income: Taxable Income and Gross Income
- Wages, tips, and other compensation received for personal services are not income.
- Only foreign-source income is taxable.
- Federal Reserve Notes are not income.
- Military retirement pay does not constitute income.
You know, just because you wish it to be true, does not make it true. If you're making money, expect it to be taxed and then be pleasantly surprised if you find out it isn't. Why do you think HSAs, 529s, and Roth IRAs are so awesome? Because those gains actually are tax-free! I think the comment posted on the blog that I mentioned above would fall into this category.
The Meaning of Certain Terms Used in the Internal Revenue Code
- Taxpayer is not a “citizen” of the United States, and thus is not subject to the federal income tax laws.
- The “United States” consists only of the District of Columbia, federal territories, and federal enclaves.
- Taxpayer is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws.
- The only “employees” subject to federal income tax are employees of the federal government.
Yes, you are a taxpayer and you must pay taxes. Even if you live in New Hampshire. Even if you're not a federal employee. Even if you're a US citizen.
Constitutional Amendment Claims
- Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment.
- Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment.
- Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment.
- Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment.
- The federal income tax laws are unconstitutional because the Sixteenth Amendment to the United States Constitution was not properly ratified.
- The Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens.
No, there is no religious exemption to taxes (render unto Caesar…); no, paying taxes is not the same as slavery (how offensive), and yes, the sixteenth amendment was ratified just fine (blame Delaware, Wyoming, and New Mexico for not standing firm if you want).
Fictional Legal Bases
- The Internal Revenue Service is not an agency of the United States.
- 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.
- African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment.
- Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime.
- 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.
- A “corporation sole” can be established and used for the purpose of avoiding federal income taxes.
- Taxpayers who did not purchase and use fuel for an off-highway business can claim the fuels tax credit.
- A Form 1099-OID can be used as a debt payment option or the form or a purported financial instrument may be used to obtain money from the Treasury.
Some real whoppers there. I can just see these being passed around in Facebook echo chambers.
Invalidity of the Assessment
- A tax assessment is invalid because the taxpayer did not get a copy of the Form 23C, the Form 23C was not personally signed by the Secretary of the Treasury, or a form other than Form 23C is not a valid record of assessment.
- A tax assessment is invalid because the assessment was made from a substitute for return prepared pursuant to section 6020(b), which is not a valid return.
No, the Secretary of the Treasury is not going to personally sign all of your tax notices.
Invalidity of the Statutory Notice of Deficiency
- A statutory notice of deficiency is invalid because it was not signed by the Secretary of the Treasury or by someone with delegated authority.
- A statutory notice of deficiency is invalid because the taxpayer did not file an income tax return.
Uh…you can't tax me, I didn't file a tax return. Not sure how someone could argue that with a straight face.
Invalidity of Notice of Federal Tax Lien
- A notice of federal tax lien is invalid because it is unsigned or not signed by the Secretary of the Treasury, or because IRS employees lack the delegated authority to file a notice of federal tax lien.
- The form or content of a notice of federal tax lien is controlled by or subject to a state or local law, and a notice of federal tax lien that does not comply in form or content with a state or local law is invalid.
Remember that whole part of the constitution where the federal government has certain powers over the states? Yes, this is one of them.
Invalidity of Collection Due Process Notice
- A collection due process notice (e.g., Letter 1058, LT-11 or Letter 3172) is invalid because it is not signed by the Secretary or his delegate.
- A collection due process notice is invalid because no certificate of assessment is attached.
Remind me never to accept a position as the Secretary of the Treasury. My hand would be so cramped. No wonder Hamilton wrote like he was running out of time.
Verification Given as Required by I.R.C. § 6330(c)(1)
- Verification requires the production of certain documents.
Another bizarre argument requiring the Secretary of the Treasury's involvement. Debunked in six separate tax court cases.
Invalidity of Statutory Notice and Demand
- No notice and demand, as required by I.R.C. § 6303, was ever received by taxpayer.
- A notice and demand is invalid because it is not signed, it is not on the correct form (such as Form 17), or because no certificate of assessment is attached.
The dog ate my homework doesn't work any better with the IRS than with your 2nd grade teacher.
Tax Court Authority
- The Tax Court does not have the authority to decide legal issues.
Yes, the tax court has jurisdiction over your taxes.
Challenges to the Authority of IRS Employees
- Revenue Officers are not authorized to seize property in satisfaction of unpaid taxes.
- IRS employees lack credentials. For example, they have no pocket commission or the wrong color identification badge.
But your badge is blue, not green!
Use of Unauthorized Representatives
- Taxpayers are entitled to be represented at hearings, such as collection due process hearings, and in court, by persons without valid powers of attorney.
You can represent yourself in tax court, but you can't use that yeahoo from your conspiracy theory Facebook group.
No Authorization Under I.R.C. § 7401 to Bring Action
- The Secretary has not authorized an action for the collection of taxes and penalties or the Attorney General has not directed an action be commenced for the collection of taxes and penalties.
The attorney general has legally delegated this duty. Sorry.
Each of these arguments is listed in that IRS document, along with all of the relevant tax and criminal court cases to show that these arguments did not and will not hold up in court.
Tax Evasion Penalties
The IRS gives further information about the penalties you will face.
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. “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.” United States v. Sloan, 939 F.2d 499, 499-500 (7th Cir. 1991).
So, that guy on Facebook (or the WCI blog comments section) who promotes this may not face any penalty at all, but if you believe him and act on it, you're the one who is going to be in trouble.
Penalties for tax evasion include:
- Accuracy-related penalty (20% of underpayment attributable to negligence or disregard of regulations)
- Civil fraud penalty (75% of the underpayment attributable to fraud)
- Erroneous claim for refund penalty (20% of the excessive amount)
- Fraudulent failure to timely file an income tax return penalty (triple the amount of the standard failure to file)
- $5,000 penalty for a frivolous tax return or other submission
- $25,000 penalty for instituting or maintaining a proceeding primarily for delay, for using a frivolous position in a proceeding, or for failing to pursue administrative remedies
- $1,000 or 50% of the income received for a tax preparer who prepares a fraudulent return
- Criminal fine of $100,000-250,000 ($500,000 for a corporation) for tax evasion and up to 5 years in jail
- Criminal fine of $100,000-250,000 ($500,000 for a corporation) and up to 3 years in jail just for promoting frivolous arguments
I'm convinced I don't want to go down this road. Are you? If not, I wish you the very best of luck, but I don't want to hear anyone else arguing for these frivolous arguments on this blog or its forums. I don't want to be sucked into your prosecution. If you’re looking for ways to lower your taxes that won’t land you in jail check out these 10 tips.
What do you think? Do you know anyone who has previously or is currently relying on a frivolous argument to avoid paying federal income tax? What happened to them? Comment below!