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How the IRS Deals With Frivolous Claims

  • 28 July 2016
  • Author: Alexander Carr
  • Number of views: 2810
How the IRS Deals With Frivolous Claims

Frivolous may be a word often used in British comedies but the IRS is quite fond of it as well. Receive a letter from the IRS accusing you of frivolous deductions or that your reasons for failing to file taxes altogether are frivolous, and you may be in some very hot water.

Gillard Schwarts of San Antonio, Texas, recently found out the hard way.

As journalist Kay Bell reports, Schwartz claimed $330,000 in moving expenses on her 2012 tax return. Allow that amount to soak in: $330,000 in moving expenses. The work-related move included the following line items:  $300,000 for transportation and storage as well as $50,000 in travel expenses (minus $20,000 paid by her employer). Instead of reducing her tax bill, however, a U.S. Tax Court ruled she is responsible for $33,107.20 in back taxes and penalties.

This particular case brings to light several important points:

  • It’s unwise to assume the IRS isn’t paying attention. It’s usually safer to file a return—any return—than to not file at all. But, as Special Trial Judge Robert N. Armen, Jr. noted in his ruling, the exceptionally large amount of negative income Schwartz claimed was difficult to ignore.  
  • When asked to “prove it,” you better have the goods. Armen also noted that Schwartz—even after being asked repeatedly for it—did not offer any documentation to prove her claims. Not one receipt. 
  • The IRS may be picking up speed in some areas of investigation. This claim, filed in 2013, was audited and closed in U.S. Tax Court within three years. For the IRS, that’s an impressive speed on a claim below the “high earner” $200,000 adjusted gross income (AGI) threshold

In February, the IRS published a revised guide titled, “The Truth About Frivolous Tax Arguments” addressing some of the more interesting arguments they get for avoiding tax payments. The guide gives counterpoints for those who claim:

  • Tax payments are voluntary.  
  • Their income isn't really "income". 
  • The wording or terms used in the tax code is confusing or can be interpreted in different ways. 
  • A certain U.S. Constitutional Amendment (First, Fourth, Fifth....take your pick) awards them freedom from taxes.
  • What the IRS calls a "fictional" legal reason, including the contention that the IRS is not a recognized agency of the U.S. government. 

According to the IRS, the penalty for filing a frivolous tax return is $5,000. Taxpayers could also be responsible for accuracy-related penalties, civil fraud penalties, erroneous refund claim penalties or failure to file penalties. Section 6673(a) of the Tax Code allows a penalty of up to $25,000 when it appears a taxpayer “instituted or maintained a proceeding primarily for delay” or that the taxpayer’s position is frivolous or groundless or the taxpayer unreasonably failed to pursue administrative remedies (Schwartz was handed a $10,000 penalty out of this potential $25,000 for her discretions in this area).

There’s often little question when it comes to what claims will be seen as frivolous in the eyes of the IRS. It requires only common sense. Those hit with heavy penalties are often well aware there’s a chance the IRS will take notice. Filing returns on time is one important step in trying to avoid the issue. Beyond that, seek professional advice (feel free to contact us) when it comes to tax deductions and other questions.

Image Copyright:  olegdudko / 123RF Stock Photo



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