Parsing Frivolous Fictions

"The Tax Code represents the genius of legal fiction...  The IRS has never really known why people pay the income tax... The IRS encourages voluntary compliance, through FEAR."

-Jack Warren Wade Jr., former IRS officer in charge of the IRS Nationwide Revenue Officer Training Program

HAVE YOU EVER SEEN one of the scary "frivolous return penalty" threats the IRS likes to send out when it wants to browbeat an educated American into just SHUTTING UP and withdrawing inconvenient testimony?  The odds are you haven't seen one personally, but you've doubtless heard about them.

I'm going to show you one today, for two reasons. First, lots of trolls and moles and scare-mongers even within the "tax-honesty" community like to carry on about these things in an effort to frighten people away from CtC and the truth about the income tax.

I want you to be inoculated against being taken in by such efforts.

The second reason is that when knowledgeably examined, these scary "notices" are actually great demonstrations of the facts that CtC is the complete and accurate truth about the tax; that the IRS knows it full well; and that the only play the bad guys have in response to that truth and the grown-up men and women who act on it is bluff, bluster. I don't want you to be a victim of these ploys, and I DO want you to be energized and inspired by what is revealed by understanding what these notices really represent.

So here we go...

LET'S BEGIN WITH A LOOK AT WHAT THE "FRIVOLOUS" PENALTY is designed to address. This will establish right off the bat that CtC-educated returns do not qualify for the penalty, and make clear why the subterfuges involved in the threatening "notices" are nothing more than cheap efforts to exploit ignorance, doubt and fear. The 'frivolous" penalty is authorized at 26 USC 6702, and...

"Section 6702 of the Code was enacted by the Tax Equity and Fiscal Responsibility Act of 1982, P.L. 97-248, 96 Stat. 324. According to the Senate Report, S. Rep. No. 97-494, Vol. 1, 97th Cong., 2d. Sess. 277 (1982), the penalty is intended to attack a variety of tax protest activities including: (1) irregular forms 1040 not in processible form because of altered or incorrect descriptions of line items or other provisions; (2) references to spurious constitutional arguments instead of required completion of a tax form; (3) forms on which there is incomplete information to calculate tax liability; (4) presentation of information which is clearly inconsistent, such as the listing of only a few dependents by a person who claims 99 exemptions; (5) “gold standard “ or “war tax” deductions; and (6) deliberate use of incorrect tax tables.

IRS Office of Chief Counsel (OCC) Memorandum 200107035.

Now let's look at what the OCC says about returns containing zeros for "income" while showing amounts withheld, amounts constituting "overpayment" and amounts to be refunded-- a fair description of many CtC-educated returns. By looking at what does qualify as an invalid-- and hence, "frivolous"-- return, we'll see what doesn't qualify.

See the following from OCC0127045.pdf. This OCC memorandum discusses the service doctrine and case-law on which it is based regarding valid versus invalid returns in terms of the number entries on them.

"Despite the Service’s broad authority to prescribe the manner of filing, the issue of what constitutes a valid return is frequently litigated. In an early case addressing the issue, the Supreme Court indicated that a “defective” or “incomplete” return may be sufficient to start the running of the period of limitation if it is a specific statement of the items of income, deductions, and credits in compliance with the statutory duty to report information. However, to have such effect, the return must honestly and reasonably be intended as such. Florsheim Bros. Drygoods Co. v. United States, 280 U.S. 453 (1930).

"Subsequently, the Court summarized the criteria as: "[p]erfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such, and evinces an honest and genuine endeavor to satisfy the law. " Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180 (1934).

"The most recent Supreme Court reaffirmation of the test articulated in Florsheim and Zellerbach is found in Badaracco v. Commissioner, 464 U.S. 386 (1984). There, the taxpayer filed a fraudulent original income tax return and followed it with a nonfraudulent amended return. The taxpayer argued that the original return, to the extent it was fraudulent, was a nullity for purposes of the statute of limitations. The Court disagreed, noting that the fraudulent original returns “purported to be returns, were sworn to as such, and appeared on their faces to constitute endeavors to satisfy the law.”"

This history-- especially Badaracco, where even an actually and admittedly fraudulent return was deemed valid nonetheless-- plainly holds that what the numbers are that appear on a return is irrelevant to its validity. In that respect, unless it has a facial indication compromising the appearance of sincerity, a return on which any numbers are entered by which any liability can be calculated is valid. In 2006, the 8th Circuit says this again very plainly:

"We therefore hold that the honesty and genuineness of the filer's attempt to satisfy the tax laws should be determined from the face of the form itself... The filer's subjective intent is irrelevant."

In re: Colson, 446 F.3d 836 (8th Cir. 2006)

 The memorandum goes on to describe representative cases in which returns were found to be invalid (all emphasis added):

"U.S. v. Porth 426 F.2d 519 (10th Cir. 1970) (no valid return where taxpayer’s Form 1040 was devoid of income information and contained cites to the Constitution purportedly supporting taxpayer’s refusal to complete the form); Thompson v. Commissioner, 78 T.C. 558 (1982) (no valid return where the Form 1040 contained only de minimis income information and was circumscribed with constitutional objections); Sochia v. Commissioner, T.C. Memo. 1998-294, (no valid return where the taxpayers provided some income information, but wrote “object -- 5th Amend.” on every line of the form).

...and then offers the OCC's conclusions:

"We are of the general opinion that a Form 1040 is a nullity in those instances in which the taxpayer has entered the number 0 for all entries on the return except the amount of tax withheld, the amount of the overpayment and the amount to be refunded, and has attached materials which protest the Constitutionality of the requirement that he pay federal income tax. Virtually all of the authority for treating a signed Form 1040 as a nullity relies upon the fact that the taxpayer refused to provide any information pertaining to his income, or provided de minimis income information and accompanied the purported return with tax protestor type arguments."

and again,

"In the case of an official Form 1040 on which the taxpayer enters the number 0 for every line of the return except the amount of tax withheld, the amount of the overpayment and the amount to be refunded, and has included attachments to the Form 1040 which protest the Constitutionality of the requirement that he pay federal income tax, the Internal Revenue Service (“Service”) may treat the Form 1040 as a nullity provided there is sufficient evidence on or attached to the Form 1040 indicating a lack of honest and reasonable attempt on the part of the taxpayer to comply with the tax laws ."

The consistent qualification in every case is something on or attached to the form, whether "protest" materials, arguments, alterations, additions or omissions, entirely extraneous to the entry of 0 for every line except the amount withheld, the overpayment and the amount to be refunded.

In the IRS's own Office of Chief Counsel summary, then, even a return containing 0 for all entries except amounts withheld, the amount of the overpayment and the amount to be refunded isn't invalid by reason of that pattern or content of entries. Such a return only qualifies as invalid when "accompanied ... with tax protestor type arguments."

By definition, a "tax protestor argument" is a declaration of disagreement with the tax. Such a declaration expresses or implies something to the effect of, "I believe this tax applies to my earnings or the activities that produced them per the law as written, but I don't think it should."

 An educated return says the exact opposite, expressing or implying, "I don't believe this tax applies to my earnings or the activities that produced them." Per the IRS's own Office of Chief Counsel summary, such a return, even one containing 0 for all entries except amounts withheld, the amount of the overpayment and the amount to be refunded cannot be legitimately declared invalid.

SO, NOW THAT WE'VE SEEN THAT CtC-EDUCATED RETURNS don't qualify as "frivolous", let's look at just what is really going on when the IRS sends out a scary-looking "notice" suggesting the contrary in any particular case.

The scare-notices used by the IRS go by a couple of different labels, but those sent in response to o CtC-educated claims are notable for both vagueness in general and for being carefully inappropriate to what the educated filer has actually done. Here is the relevant portion of one of these notices (a "LTR 3176C") sent to a CtC-educated American after she had filed a return reporting that she had no earnings qualifying as "wages" or "income" under any other label, and seeking the return of all property that had been withheld from her in connection with payments she had received for her work during the previous year:

As Count Scary would have said on SCTV, "Scary, huh?!"

The first thing to understand about these ominous-looking notices is that however much they are designed to look otherwise, they are actually just proposals. See here for more on this.

Next, look at the statute (in relevant part, and with highlighting added for reasons which will become clear) cited by this scary threat and its bad cop/good cop reassuring offer of "amnesty" if only the this woman will back off, lay down and zip her d**ned lip like a good girl:

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.

(b) Civil penalty for specified frivolous submissions

(1) Imposition of penalty

Except as provided in paragraph (3), any person who submits a specified frivolous submission shall pay a penalty of $5,000.

(2) Specified frivolous submission

For purposes of this section—

(A) Specified frivolous submission

The term “specified frivolous submission” means a specified submission if any portion of such submission—

(i) is based on a position which the Secretary has identified as frivolous under subsection (c), or

(ii) reflects a desire to delay or impede the administration of Federal tax laws.

(B) Specified submission

The term “specified submission” means—

(i) a request for a hearing under—

(I) section 6320 (relating to notice and opportunity for hearing upon filing of notice of lien), or

(II) section 6330 (relating to notice and opportunity for hearing before levy), and

(ii) an application under—

(I) section 6159 (relating to agreements for payment of tax liability in installments),

(II) section 7122 (relating to compromises), or

(III) section 7811 (relating to taxpayer assistance orders).

(3) Opportunity to withdraw submission

If the Secretary provides a person with notice that a submission is a specified frivolous submission and such person withdraws such submission within 30 days after such notice, the penalty imposed under paragraph (1) shall not apply with respect to such submission.

OK, now a little parsing-work, which will seem a bit complicated unless you're used to this, but which won't really be that hard, and which will richly reward in the end.

Having read through the statute, this is what I want you to notice about the "LTR 3176C": Although it sprinkles the term "return" here and there, this "LRT 3176C" alleges that "what [was] submitted" by the target of this ploy has been "determined" to be subject to a "frivolous penalty" because it is (allegedly) based on only one of two things: "-your information is based on positions identified as frivolous under section 6702(c)"; -your information reflects a desire to delay or impede the administration of federal tax laws".

Now, ask yourself: EVEN IF TRUE, would either of the alleged flaws make a return "frivolous"?

NO, THEY WOULD NOT!

The two flaws listed (neither of which is actually specified as being relied upon in any event) DO mirror the second category of characteristics that would be involved in determining that a return is "frivolous" (those in 6702(a)(2)(A) and (B)). BUT...

Alone, those characteristics DON'T apply to a return AT ALL. Neither can apply UNLESS and UNTIL one or the other of the ADDITIONAL characteristics specified in 6702(a)(1)(A) or (B) have been found to be true (characteristics rendering a return a mechanically-defective affidavit due to a failure to contain information be which the substantial correctness of the self-assessment can be judged or the presence of information which, on its face, indicates that the self-assessment is substantially incorrect, either of which then has to ALSO be found to be due to a position identified as frivolous under 6702(c) or be manifestly due to a desire to delay or impede the administration of federal tax laws). Neither of these primary required characteristics are even alluded-to on this scary notice.

This means that despite its carefully-organized and misleading language and references, this notice doesn't even facially purport to be relevant to a return! In fact, it is designed to NOT be mistaken as a valid notice that a "determination of a frivolous return" has been made-- by a careful and knowledgeable recipient. (But it IS plainly intended to be mistaken for such a notice by an ignorant or intimidated recipient.)

BUT THAT'S JUST THE BEGINNING...

I want you to now look at what is listed in the statute as 6702(b)(2)(A)(i) and (ii). You'll notice that those characteristics are the same as those in 6702(a)(2)(A) and (B) (and therefore the same provisions referenced on the notice which we discussed above: -your information is based on positions identified as frivolous under section 6702(c)"; -your information reflects a desire to delay or impede the administration of federal tax laws").

What is significant here is that NOW we're looking at the portion of the statute in which these characteristics alone ARE enough to render something "frivolous" and subject to a penalty. But this portion of the statute HAS NOTHING TO DO WITH RETURNS.

Instead, this portion of the statute only addresses "Specified frivolous submissions", which include nothing but requests for hearings and applications for installment agreements, compromises and "taxpayer assistance orders". (Look carefully at part (b) of the statute: "Civil penalty for specified frivolous submissions". It's a definitional tree, saying: "Specified frivolous submission"="specified submissions" which are based on one or the other of the characteristics listed in 6702(b)(2)(A)(i) and (ii); and "specified submissions"=only requests for hearings and applications for installment agreements, compromises and "taxpayer assistance orders" .)

If the notice REALLY were claiming that a RETURN had been determined to be frivolous, it would necessarily refer to both categories of elements necessary for a return to be "frivolous" and subject to a penalty. That is, it would allude to both the two characteristics the notice DOES allude to, AND the two from 6702(a)(1) that it does not.

ALL the notice alludes to are the two characteristics sufficient to qualify only a request for hearing and applications for installment, compromise or TAO as "frivolous" and subject to penalty (if one or the other of the characteristics were true). Thus, the notice can only be deemed relevant to such requests or applications (if to anything at all).

BUT WAIT, THERE'S MORE...

Looking at the statute again, we see that it is ONLY "Specified frivolous submissions" that can receive the 30-day "withdraw and replace" offer the LTR 3176C extends. So...

Insofar as this notice purports to be a response and threat related to a return, there can be little question that it is a carefully-crafted, COMPLETE CHARADE. It is a fiction. A bluff.

What's more, there can be little question that this notice is what it is, and was sent as it was, BECAUSE A CtC-EDUCATED RETURN IS NOT "FRIVOLOUS", and the IRS can't (and doesn't dare) actually say that it is. At the same time, there can be little question that this notice is what it is, and was sent as it was, because the agency DESPERATELY WANTS TO FRIGHTEN PEOPLE INTO WITHDRAWING THEIR EDUCATED RETURNS (or into not making them in the first place).

Why else deploy a sleazy subterfuge like this other than because the agency HAS no legal means for evading or penalizing a proper, educated return? Clearly, the tax agency is trying to scare folks into relinquishing their rights and their property because it can't lay claim to that property otherwise. There is no credible alternative explanation.

Make no mistake about this. Recognize that this thing didn't get written by a malfunctioning computer.

This got carefully-written by someone deliberately attempting to suggest what they know ISN'T TRUE. That someone is just hoping that YOU WON'T UNDERSTAND THAT, because lies and dodges and the exploitation of ignorance, doubt and fear are all they've got to work with. The law is with the educated filer, not the tax agency.

So, keep the truth in mind, and keep your feet, even in the blustery wind. And when you run into someone waving one of these notices, set 'em straight.

***

BY THE WAY, there are other aspects to "frivolous penalty" protocols that some will find of interest. One is the "burden of proof" issue:

26 U.S. Code § 6703 - Rules applicable to penalties under sections 6700, 6701, and 6702

(a) Burden of proof

In any proceeding involving the issue of whether or not any person is liable for a penalty under section 6700, 6701, or 6702, the burden of proof with respect to such issue shall be on the Secretary.

Another is the manner specified for the assessment of the penalty: