IRS Issues Publication on Frivolous Tax Arguments

Posted on April 8, 2010


As Benjamin Franklin famously stated, there are only two certainties in life – death and taxes. And most of us are willing to try whatever means are necessary to avoid them both.

In preparation for this year’s April 15 tax deadline, the IRS released the newest version of its annual document, The Truth About Frivolous Tax Arguments, on February 5, 2010. The 80-page document details the primary means by which citizens attempt to avoid paying their full-share of federal taxes as well as legal explanations that refute each of these frivolous positions.  While there are literally hundreds (at least) frivolous positions out there, the 2010 publication identifies twenty-six (26) common frivolous income return positions as well as sixteen (16) common frivolous positions taken in Collection Due Process proceedings.

Some of the more well known frivolous income tax positions discussed in the publication are:  (i) taxpayers may refuse to pay federal income taxes on religious or moral grounds by invoking the First Amendment to the U.S. Constitution, (ii) compelled compliance with the Internal Revenue Code constitutes a form of servitude that is violation of the Thirteenth Amendment prohibition against slavery, and (iii) the Sixteenth Amendment was never properly ratified and, thus, the federal income tax laws are unconstitutional.  Some of the less commonly known frivolous positions identified are:  (i) a taxpayer may eliminate his or her federal income tax liability by attributing all of his or her income to various trusts and deducting all of his or her personal expenses as trust expenses; (ii) establishing a “corporation sole” (typically used by heads of religious entities) to avoid federal income taxes; and (iii) that Form 1099-OID may be used as an instrument for the payment of tax and non-tax debts.

The frivolous tax positions identified in the IRS’s publication seem to be obviously bogus.  However, there is a huge underground industry charging naïve taxpayers significant sums of money to learn how to utilize such frivolous positions to allegedly reduce or eliminate their tax burden.  I have represented many taxpayers that have been duped into participating in such schemes.  Sometimes unwinding these scams—like sham trusts used to eliminate income—can take months or years and can cost the taxpayers a great deal in lawyer and accountant fees.  The payment of lawyer and accountant fees can be nothing compared to the repayment of the federal government.

The penalty for filing a frivolous tax return is currently $5,000 (raised from $500 in 2006).  The penalty applies when any position taken in the return has been identified by the IRS as frivolous.  This $5,000 penalty is in addition to other penalties imposed by the IRS, such as the (up to) twenty-five percent failure to file penalty, the (up to) seventy-five (75%) fraudulent failure to file penalty, and the general seventy-five (75%) civil fraud penalty.  It not uncommon for the penalties and interest imposed with respect to taking a frivolous position to equal or exceed the tax that must be repaid.  Accordingly, please consult your tax and/or legal advisor before taking any position on your return that appears “too good to be true.”

For more information on frivolous tax positions and The Truth About Frivolous Tax Arguments, please visit the IRS website.

Russell Cunningham, Cunningham Firm, LLC