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Welcome to TaxBlawg, a blog resource from Chamberlain Hrdlicka for news and analysis of current legal issues facing tax practitioners. Although blawg.com identifies nearly 1,400 active “blawgs,” including 20+ blawgs related to taxation and estate planning, the needs of tax professionals have received surprisingly little attention.

Tax practitioners have previously lacked a dedicated resource to call their own. For those intrepid souls, we offer TaxBlawg, a forum of tax talk for tax pros.

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You’ve Heard Of The Seven Deadly Sins? The IRS Adds A Few More

There are a number of things that frustrate the Internal Revenue Service, ranging from not filing tax returns on time, not paying taxes when due, not providing sufficient estimated taxes, business failure to pay its employment taxes, entering into a "listed transaction," and generally saying bad things about the Agency.  Every year, IRC §6702 requires the IRS to publish a list to identify positions that it views as "frivolous" and subject to a penalty.  This year's list has been issued, and you may find it interesting.  We will try to cover the more interesting ones.

The first is taking the position that the Internal Revenue laws are purely voluntary and "optional," such that one need not file a Federal Income Tax Return or an Information Return or pay tax because it is "voluntary."  This also includes arguments that the person need not do so unless the IRS responds to a series of questions first, or asserts that the instructions to the income tax forms do not display sufficient OMB control numbers.  Another variation is one where a person concludes he may lawfully decline to pay taxes if he disagrees with the use of the tax revenues.

Always popular is the contention that federal income taxes are unconstitutional, or that a person has the "constitutional right not to comply" under the First Amendment, the Fourth Amendment, the Fifth Amendment, and the Ninth Amendment.  Other variations include the notion that a person must be a "citizen" within the meaning of the Fourteenth Amendment, and that the Sixteenth Amendment was not ratified.  Similarly, another argument is that a taxpayer is not a "person" within the meaning of the Internal Revenue Code, that only fiduciaries are taxpayers – persons with a fiduciary relationship to the United States which, of course, the IRS must prove to their satisfaction.

Another position is that the Internal Revenue Code is not "law" because it has not been properly implemented by regulations.  Anyone who looks at the number of volumes of regulations issued to interpret the Code will find this particularly funny.

Another is that the taxpayer's income is "excluded" when the taxpayer rejects or renounces United States citizenship, claiming to be a citizen exclusively of a state (we seem to have a few of those in Texas).  Then there is one that wages, tips and compensation for performance of personal services are not taxable income or are off-set by an equivalent deduction for the value of the personal services rendered.  The next is to the affect that only foreign based income, or income received by non-resident aliens and foreign corporations’ resources within the United States is taxable.  In another variation, a taxpayer claims to have been "untaxed, detaxed, or removed or redeemed" from the federal tax system even though the taxpayer remains a United States citizen or resident.  A further variation is that only certain classes of taxpayers are subject to income and employment taxes, those being employees of the federal government, corporations, non-resident aliens, residents of the District of Columbia or federal territories, or similar contentions.  There is also a contention that taxpayer's wages are included from social security taxes if he waives the right to receive social security benefits, or may claim a charitable contribution for the social security taxes that are paid.

Always popular is the contention that Federal Reserve notes are not taxable income because they are not gold or silver and cannot be redeemed for them.  The "other side of the coin" (no pun intended) is the contention that in a transaction using gold or silver coins, the value of the coins is excluded, so the amount realized is just the face value of the coins and not their fair market value.

Some taxpayers purport to operate a home-based business to deduct as business expenses their personal expenses or the cost of maintaining their household, even when it is not a bona fide home business or an office in the home.  Some of the taxpayers on this radar screen also run into problems when they try to reduce or eliminate their liability by altering a tax return, such as by striking out the penalty of perjury declaration, or attaching documents in the nature of a disclaimer of liability.

Similarly, some taxpayers claim a deduction or credit for an amount of withheld income tax, or the tax that is obviously false because in proportion to the amount of income that is reported on the return.  For many years there has also been a “reparations tax credit” by certain ethnic groups and includes a variation where Native Americans or others who not an "employer" can claim an "Indian Employment Credit" which requires that the taxpayer be an employer engaged in a trade or business.  Others have claimed a disabled access credit to reduce tax or generate a refund by claiming to have purchased equipment or services for an inflated price even though the taxpayer was not eligible to use it.

The foregoing examples are simply a handful of the forty-six which were recently published in IRS Notice 2010-33.  The others are not mentioned simply because the author wishes to limit the length of this article, but is confident that the examples here indicate the breadth of imagination people have exercised to reduce their income taxes.  When someone presents a scheme or argument like this, it is clearly "too good to be true," and one should expect the IRS to react harshly when it is implemented.

  • George W. Connelly

    George Connelly is recognized as one of the leading federal tax litigators in the United States.  His practice focuses on IRS audit, collection and criminal matters including civil and criminal tax litigation matters, for clients ...