Assertion: CtC-educated filings qualify for "frivolous return" penalties
BUT THE TRUTH IS FASCINATING! The IRS has actually deployed a brazen hoax regarding "frivolous return penalties" in an effort to discourage CtC-educated tax returns and refund claims.
Here's how it works. Pursuant to 26 U.S.C. § 6702, only returns which manifest one of the "frivolous positions" appearing on an official list produced by the Secretary of the Treasury can be subject to the "frivolous return" penalty. (Returns which overtly manifest a desire to impede or delay the administration of the tax laws alternatively qualify, but delay and impediment are the last things desired by educated filers and no such expression appears on CtC-educated returns, examples of which can be seen here, here and here.)
The "position" specs appear in the law as follows:
26 USC § 6702 - Frivolous tax submissions
(a) Civil penalty for frivolous tax returns
A person shall pay a penalty of $5,000 if—
(1) such person files what purports to be a return of a tax imposed by this title but which—
(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or
(B) contains information that on its face indicates that the self-assessment is substantially incorrect, and
(2) the conduct referred to in paragraph (1)—
(A) is based on a position which the Secretary has identified as frivolous under subsection (c), or
(B) reflects a desire to delay or impede the administration of Federal tax laws.
(c) Listing of frivolous positions
The Secretary shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous for purposes of this subsection.
Upon the addition of subsection (c) to the law in 2006, the Secretary promptly issued the required list, which has been revised twice since then. The current list can be seen here or here (applying to filings since April, 2010); its predecessor (applying to filings between January, 2008 and April, 2010) can be seen here; and the original (applying to filings between March, 2007 and January, 2008) can be seen here.
SO, HERE'S THE PROBLEM THIS LIST REPRESENTS FOR THE IRS: CtC-educated returns aren't even remotely "based on a position" on the Secretary's list.
However, the IRS really wants to use the "frivolous return penalty" threat in hope of scaring a few educated Americans into reversing themselves and climbing back into their old stall in the "ignorance tax" barn, as seen in the cases discussed here, here and here. It also hopes that rumors of these penalties will discourage Americans who have never read CtC from doing so.
So, the reality-thwarted agency has devised a "work-around". It has created a fake list, on which appears an entry meant to be taken as a CtC-relevant "position".
THE LIST WITH THE FAKE ENTRY appears on the IRS website at this page (at 25.25.10-1 near the bottom of the page). Here is the text of the entry meant to be taken as an expression of "the CtC position":
44. Zero Wages on a Substitute Form: Taxpayer generally attaches either a substitute Form W-2, Form 1099, or Form 4852 that shows "$0" wages or no wage information. A statement may be included indicating the taxpayer is rebutting information submitted to the IRS by the payer. Entries are usually for Federal Income Tax Withheld, Social Security Tax Withheld, and/or Medicare Tax Withheld. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and IRC 3121", or may include some reference to the company refusing to issue a corrected Form W-2 for fear of IRS retaliation.
As noted, this entry is a complete fabrication. It doesn't appear in the actual official list at all, and never has.
Here is the actual, official and valid "frivolous Argument 44" from the actual list published by the Secretary:
(44) A taxpayer’s income is not taxable if the taxpayer assigns or attributes the income to a religious organization (a “corporation sole” or ministerial trust) claimed to be tax-exempt under section 501(c)(3), or similar arguments described as frivolous in Rev. Rul. 2004-27, 2004-1 C.B. 625.
Plainly, there isn't even a pretense of a relationship between the fake-list "Argument 44" and the real Argument 44.
Further, not only is the fake-list "position" a false representation of an official listed position, but as will be seen when reading it through with this in mind, it isn't even a "position" at all. The fake-list "Argument 44" is just a description of how forms are filled-out. An actual "position" is not WHAT you do, or HOW you do it, it is WHY you did whatever you did.
The preamble to the official "frivolous positions" list is quite clear about this:
Positions that are the same as or similar to the positions listed in this notice are identified as frivolous for purposes of the penalty for a “frivolous tax return” under section 6702(a) of the Internal Revenue Code and the penalty for a “specified frivolous submission” under section 6702(b). Persons who file a purported return of tax, including an original or amended return, based on one or more of these positions are subject to a penalty of $5,000 if the purported return of tax does not contain information on which the substantial correctness of the self-assessed determination of tax may be judged or contains information that on its face indicates the self-assessed determination of tax is substantially incorrect. Likewise, persons who submit a “specified submission” (namely, a request for a collection due process hearing or an application for an installment agreement, offer-in-compromise, or taxpayer assistance order) based on one or more of the positions listed in this notice are subject to a penalty of $5,000. The penalty may also be applied if the purported return or any portion of the specified submission is not based on a position set forth in this notice, yet reflects a desire to delay or impede the administration of Federal tax laws for purposes of section 6702(a)(2)(B) or 6702(b)(2)(A)(ii).
"Based on one or more of these positions". Clearly, the fake entry 44 in the false list cannot qualify as an actual "frivolous position" regardless of where it is or isn't found. It is not a "position" (on which actions are "based") at all-- it is simply a description of some paperwork and the way it's filled-out.
The official-list preamble continues, making another specification by which CtC-educated returns are excluded from qualifying for the penalty, even without regard to what "position" is alleged:
The penalty will be imposed only when the frivolous position or desire to delay or impede the administration of Federal tax laws appears on the face of the return, purported return, or specified submission, including any attachments to the return or submission.
NOTWITHSTANDING ITS ILLEGITIMACY on all these several fronts, the fake-list "Argument 44" is used by the IRS as a pretext for its occasional "assertions" of "frivolous return penalties" against CtC-educated filings. Here's an example of the fake entry being deployed in a transcript as part of this effort (in the center of the highlighted lines, showing as "CVPN (for "civil penalty")-ARG44"):
Needless to say, this fake-list hoax and pretended "position" is resorted-to by the government because it can't describe as "frivolous" the ACTUAL position on which any CtC-educated filing is based-- that the income tax is an excise on privileged activities.
Nor does anything on the "frivolous position" list (real list or fake one, for that matter) contradict or challenge what might be described as secondary "positions" informing educated filings, such as,
The implications of the government's silence on these matters in this context is obvious, and the shabbiness of this whole program of deception is breath-taking. It makes you want to take a shower and then march on Washington, doesn't it?
ALL IN ALL, WHAT WE HAVE HERE is a ugly and deeply corrupt little scam-- but a very revealing one, at the same time (as they always are). One doesn't engage in frauds like this unless one has no alternative, and is in dire straits, as well. In fact, those straits are SO dire for those threatened by CtC that they have resorted to outright forgeries and perjuries in vain efforts to shield their lies from the cleansing light of the truth.
BTW: If you've been a victim of this hoax/fraud please take action to prepare for membership in a class-action lawsuit. CLICK HERE for details and information on steps which need to be taken.
BTW II: For a drill-down on the law regarding the "frivolous return penalty" more generally, see this.