The 2019 IRS “Dirty Dozen” Tax Scams #11: Frivolous Tax Arguments

Next on the IRS Dirty Dozen list is an item that appears every year – a warning about frivolous tax arguments.

Frivolous Tax Arguments is something that appears on every year’s “IRS Dirty Dozen.” While many of the frivolous tax arguments made each year are made by taxpayers to either reduce their tax liability or increase their refund (e.g., the Form 1099-OID scam), this year we’re going to highlight some excuses people have come up with to avoid filing their annual tax return and/or paying federal income tax altogether, and why these arguments consistently fail.

1. Paying taxes is voluntary

Some people are under the mistaken impression that when we refer to the U.S. tax system as a “voluntary” system, this means that people merely “volunteer” to comply with U.S. tax laws and that filing an annual tax return is optional. The term “voluntary” actually means “self-assessment” – you use the Internal Revenue Code to determine your taxable income, expenses, deductions, and credits, calculate for yourself the correct amount of tax due, and prepare and file your own tax returns. The U.S. tax system was designed this way because the IRS does not have the resources to manage or audit every U.S. taxpayer’s return. The filing of a return and payment of taxes is required, per 26 U.S. Code § 6011(a). If you fail to fail you will be fined and/or sent to jail.

2. The IRS must prepare a federal tax return for someone who fails to file their own

There are some people who have misinterpreted 26 U.S. Code § 6020(b), which permits the IRS to prepare a “Substitute for Return” (SFR) for someone who fails to do that for himself. The purpose of an SFR is to enable the IRS to determine what a taxpayer owes (and usually results in a higher tax bill than the taxpayer’s own assessment would). There is no provision in Section 6020(b) that requires the IRS to prepare or sign SFRs, nor does it excuse a person who fails to file from tax penalties.

3. Wages, tips, and other compensation received for personal services are not income

There are individuals who have claimed that the exchange of labor or time for money is not taxable. The compensation they receive for their services, they argue, is not taxable income because the 16th Amendment didn’t authorize the imposition of taxes on wages and salaries, but rather only on gain or profit. They should note that 26 U.S. Code § 61 defines taxable “gross income” as “all income from whatever source derived.” Compensation for services is listed in section (a)(1).

4. Only employees of the federal government are subject to federal income tax

Well, that would be convenient to those of us who work in the private sector! Unfortunately, this claim is wrong. Although, as these tax objectors contend, 26 U.S. Code § 3401 states that the term “employee” includes “an officer, employee, or elected official of the United States,” doesn’t mean that it excludes everyone else!

5. Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment

Some people claim that they are not obligated to pay federal income taxes (and consequently fund programs that are objectionable to them) on account of their religious beliefs. Note that neither the First Amendment nor the Religious Freedom Restoration Act (RFRA) provides anyone the right to avoid paying taxes on religious grounds.

Taxpayers have come up with so many invalid excuses to avoid or minimize their taxes, that the IRS has an online publication entitled “The Truth About Frivolous Tax Arguments.” This guide of excuses and the government’s response to each can be found here.

Penalties for making a frivolous tax argument

Note that the penalty for making a frivolous tax argument is $5,000, so think twice before making an unusual claim. There are more significant consequences for failing to file a return altogether.

The tax attorneys and accountants at Moskowitz, LLP have substantial experience handling unfiled and delinquent tax return issues, and can prepare late returns for you even if you have lost all or part of your records.