In the lead-up to this year’s tax filing deadline which falls on April 18, 2017, the IRS is known to announce various civil and criminal tax enforcement actions. Many of these tax enforcement actions are the product of months or years of investigatory work by the criminal investigation division of the IRS. While the IRS engages in tax enforcement year-round, it often ramps up announcements of alleged criminal tax charges and tax convictions to coincide with the time of year where taxpayers are most likely to complete their taxes. Through this approach, the IRS hopes that taxpayers will think twice before inflating expenses or deductions, concealing income, or engaging other types of tax fraud or tax evasion.
Man Charged in Decades-Long Tax Evasion Scheme
Prosecutors allege that, for more than two decades, a Utah man engaged in a tax evasion scheme. The tax fraud scheme was allegedly predicated upon providing false tax information to the authorities. According to claims by prosecutors, this scheme worked for nearly two decades. However, changes in how taxes are administered, including the use of computerized form and information matching, means that computers are able to verify the information you submit by comparing it to the information your employer submits.
According to allegations made by tax prosecutors, Robin Dale Kartchner has claimed an income of $0 for a number of years where, in reality, they charge he earned well over $100,000. According to charging documents the taxpayer’s scheme involved:
“[The defendant] has repeatedly prepared and submitted false information to the tax commission to obtain money to which he is not entitled. He has repeatedly filed false returns and false substitute W-2s claiming he has no income when employer information obtained by the state showed substantial income. He received proceeds from these activities in the form of refunds which were applied to reduce other existing tax liabilities”
The documents charge that the taxpayer filed false substitute W-2 forms for 2007, 2008, 2009, 2012, 2014 and 2015. These substitute W-2 forms indicated that the taxpayer had thousands of dollars in employment tax withholding. However, despite the withholding, the taxpayer claimed no income since 1996. According to his employer, the taxpayer earned 100,000 in 2007; more than $112,000 in 2008 and 2009; about $85,000 in 2010-13 and 2015. However, the taxpayer erroneously claimed that he was not subject to tax because, in his interpretation of tax law, his income was not ‘compensation.’
The Danger of Frivolous Tax Arguments
Two common frivolous tax arguments associated with filing a “zero return” include the mistaken belief that a taxpayer can:
- Reduce federal income tax liability by filing a “zero return.”
- Exclude wages, tips, and other income from one’s taxes.
Both of these arguments are frivolous tax arguments that are well known to the IRS and state tax agencies. Frivolous tax arguments are known positions a taxpayer can take that have little to no support in actual tax law. As to the first contention, a “zero return” where a taxpayer files a tax return claiming no income is typically accompanied by filing an amended W-2 seeking a refund of payroll tax withholding. Internal Revenue Bulletin: 2004-12 warns taxpayers against taking actions of this type.
As to the second contention regarding the mistaken belief that tips, wages, and other “personal services income” does not constitute taxable income, this is also a frivolous tax argument. Taxpayers making this argument may also claim that “no taxable gain exists when a taxpayer exchanges labor for money.” This argument and several variants are well-known frivolous tax arguments in contradiction of Section 61 of the Internal Revenue Code. Under this section of the tax code, “gross income” includes income from all sources.
Taxpayers who make frivolous tax arguments can face additional penalties on top of any tax laws they violated when implementing or otherwise pursuing these frivolous tax arguments. Taxpayers who advance frivolous tax arguments can be subject to an array of penalties including:
- Failure to file a tax return under IRC Section 6651(a)(1).
- Failure to pay taxes due and owing under IRC Section 6654.
- The accuracy-related tax penalty under IRC Section 6662.
- The civil fraud penalty under section 6663 where 75 percent of the underpayment of tax is attributed to fraud.
- The erroneous claim for refund penalty under IRC Section 6676.
- Under Section 6702 of the IRC, a taxpayer can also face a $5,000 penalty for frivolous tax return submissions and other document submissions.
Furthermore, under IRC Section 6673(a), a tax court is authorized to impose a penalty of up to $25,000 when a taxpayer initiates a proceeding solely for the purposes of delay, the grounds for the proceeding are frivolous, and the taxpayer unreasonably failed to pursue administrative tax remedies.
What Charges Does the Taxpayer Face?
In the matter described above, the taxpayer faces 22 state tax charges. The charges the taxpayer faces are:
- Nine counts of failing to render a proper tax return
- Six counts of intending to defeat the payment of a tax
- Six counts of communications fraud
- One count of engaging in a pattern of unlawful activity
Although the taxpayer currently faces state tax charges, it is common for state tax agencies to share information with the IRS. This often leads to additional tax charges at the federal level.
Speak to a Tax Lawyer Before Relying on Frivolous Tax Arguments
If a tax practice or tax strategy sounds too good to be true, it probably is. If an individual or tax preparer is promising tax savings that seem impossibly generous or implausible, it is wise to seek a second opinion prior to committing to the strategy. If you have already implemented one of the above frivolous tax arguments or a potentially abusive tax structure, we can help assess your risk of facing an audit or criminal tax enforcement and develop a plan to bring you back into compliance with the law. To schedule a confidential, reduced rate consultation at the Los Angeles or Irvine locations of the Tax Law Offices of David W. Klasing, please call 800-681-1295 or contact us online.
