10 September 2018: Can You Really (and legally) Reduce Your Federal Tax Liability By Filing a ZERO DOLLAR TAX RETURN? ("NO") Some taxpayers attempt to reduce their federal income tax liability by filing a tax return that reports no income and no tax liability (a “zero return”) even though they have taxable income. Many of these taxpayers also request a refund of any taxes withheld by an employer. These individuals typically attach to the zero return a “corrected” Form W-2 or another information return that reports income and income tax withholding, reling on one or more of the frivolous arguments discussed throughout this outline to support their position.
The Law: A taxpayer that has taxable income cannot legally avoid income tax by filing a zero return. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Courts have repeatedly penalized taxpayers for making the frivolous argument that the filing of a zero return can allow a taxpayer to avoid income tax liability or permit a refund of tax withheld by an employer. Courts have also imposed the frivolous return and failure to file penalties because these forms do not evidence an honest and reasonable attempt to satisfy the tax laws or contain sufficient data to calculate the tax liability, which are necessary elements of a valid tax return. See Beard v. Commissioner, 82 T.C. 766, 777-79 (1984). Furthermore, including the phrase “nunc pro tunc” or other legal phrase has no legal effect and does not serve to validate a zero return. See Rev. Rul. 2006- 17, 2006-1 C.B. 748; Notice 2010-33, 2010-17 I.R.B. 609. The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2004-34, 2004-1 C.B. 619.
Relevant Case Law:
Kelly v. United States, 789 F.2d 94 (1st Cir. 1986) – the 1st Circuit found that the taxpayer’s failure to report any income from wages, the “unexplained designation of his Form W-2 as ‘Incorrect’, and his attempt to deduct as a cost of labor expense on Schedule C an amount almost identical to the amount of wages on Form W-2” established that his position (that compensation for his labor was not “wages” or taxable income) was both incorrect and frivolous.
Sisemore v. United States, 797 F.2d 268 (6th Cir. 1986) – the 6th Circuit upheld the assessment of a frivolous-return penalty on taxpayers because “their amended return [showing no income] on its face clearly showed that their assessment of their taxes was substantially incorrect and that their position on the matter [that their wages were zero because received in equal exchange for their labor] was frivolous.”
Olson v. United States, 760 F.2d 1003 (9th Cir. 1985) – the 9th Circuit held that the district court properly found the taxpayer was liable for a penalty for filing a frivolous tax return because he listed his wages as zero and attempted “to escape tax by deducting his wages as ‘cost of labor’ and by claiming that he had obtained no privilege from a governmental agency.”
Davis v. United States Government, 742 F.2d 171 (5th Cir. 1984) – the 5th Circuit held as clearly frivolous the taxpayers’ reasons (“rejected . . . time and time again”) for reporting no wages and no gross income, when they had received over $60,000 in earnings or other compensation as evidenced by the Forms W-2 attached to their Form 1040.
United States v. Melone, 111 A.F.T.R.2d (RIA) 2013-1369 (D. Mass. 2013) – the court held that the taxpayer, who filed “zero returns,” falsely asserting he made no income, was liable for civil penalties.
United States v. Ballard, 101 A.F.T.R.2d (RIA) 1241, (N.D. Tex. 2008) – the court permanently enjoined a tax return preparer from engaging in further tax return preparation or tax advice because he prepared federal income tax returns for customers that falsely showed nothing but zeroes.
Bonaccorso v. Commissioner, T.C. Memo. 2005-278, 90 T.C.M. (CCH) 554 (2005) – the taxpayer filed zero returns based on the argument that he found no Code section that made him liable for any income tax. The court held that the petitioner’s argument was frivolous, citing to section 1 (imposes an income tax), section 63 (defines taxable income as gross income minus deductions), and section 61 (defines gross income). The court also imposed a $10,000 sanction under section 6673 for making frivolous arguments.
Other Cases: United States v. Schiff, 544 F. App’x 729 (9th Cir. 2013); United States v. Conces, 507 F.3d 1028 (6th Cir. 2007); United States v. Schiff, 379 F.3d 621 (9th Cir. 2004); United States v. Nichols, 115 A.F.T.R.2d (RIA) 2015-1971 (D. Wash. 2015); United States v. Hill, 97 A.F.T.R.2d (RIA) 2006-548 (D. Ariz. 2005); Little v. United States, 96 A.F.T.R.2d (RIA) 2005-7086 (M.D.N.C. 2005); Schultz v. United States, 95 A.F.T.R.2d (RIA) 2005-1977 (W.D. Mich. 2005); Waltner v. Commissioner, T.C. Memo. 2015-146, T.C.M. (RIA) 2015- 146 (2015); Hill v. Commissioner, T.C. Memo. 2014-101, 108 T.C.M. (CCH) 12 (2014); Shirley v. Commissioner, T.C. Memo. 2014-10, 107 T.C.M. (CCH) 1057 (2014); Waltner v. United States, 98 Fed. Cl. 737 (2011); Oman v. Commissioner, T.C. Memo. 2010-276, 100 T.C.M. (CCH) 548 (2010); Blaga v. Commissioner, T.C. Memo. 2010-170, 100 T.C.M. (CCH) 91 (2010).
7 September 2018: Is Paying Federal Taxes Voluntary? Some argue that they are not required to pay federal taxes because the payment of federal taxes is voluntary. Proponents of this position argue that our system of taxation is based upon voluntary assessment and payment. They frequently claim that there is no provision in the Internal Revenue Code or any other federal statute that requires them to pay or makes them liable for income taxes, and they demand that the IRS show them the law that imposes tax on their income. They argue that, until the IRS can prove to these taxpayers’ satisfaction the existence and applicability of the income tax laws, they will not report or pay income taxes. These individuals or groups reflexively dismiss any attempt by the IRS to identify the laws, thereby continuing the cycle. The IRS discussed this frivolous position at length and warned taxpayers of the consequences of asserting it in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.
The Law: The requirement to pay taxes is not voluntary. Section 1 of the Internal Revenue Code clearly imposes a tax on the taxable income of individuals, estates, and trusts, as determined by the tables set forth in that section. (Section 11 imposes a tax on corporations’ taxable income.) Furthermore, the obligation to pay tax is described in section 6151, which requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the non-complying individual to criminal penalties, including fines and imprisonment, as well as civil penalties. In United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983), the Eighth Circuit Court of Appeals stated, in discussing section 6151, that “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the appropriate rate of income tax, a duty which he chose to ignore.”
Although courts, in rare instances, have waived civil penalties because they have found that a taxpayer relied on an IRS misstatement or wrongful misleading silence with respect to a factual matter, there have been no cases in which the IRS’s lack of response to a taxpayer’s inquiry has relieved the taxpayer of the duty to pay tax due under the law. Such an estoppel argument does not, however, apply to a legal matter such as whether there is legal authority to collect taxes. See, e.g., McKay v. Commissioner, 102 T.C. 465 (1994).
Relevant Case Law:
United States v. Schiff, 379 F.3d 621 (9th Cir. 2004); see also http://www.usdoj.gov/tax/txdv04551.htm. – the court affirmed a federal district court’s preliminary injunction barring Irwin Schiff, Cynthia Neun, and Lawrence N. Cohen from selling a tax scheme that fraudulently claimed that payment of federal income tax is voluntary. In subsequent criminal trials, these three were convicted of violating several criminal laws relating to their scheme. See 2005 TNT 206-18. Schiff received a sentence of more than 12 years in prison and was ordered to pay more than $4.2 million in restitution to the IRS; Neun received a sentence of nearly 6 years and was ordered to pay $1.1 million in restitution to the IRS; and Cohen received a sentence of nearly 3 years and was ordered to pay $480,000 in restitution to the IRS. See http://www.usdoj.gov/opa/pr/2006/February/06_tax_098.html.
Keenan v. Commissioner, 233 F. App’x 719, 720 (9th Cir. 2007) – the 9th Circuit stated that “assertions that the tax system is voluntary” are frivolous.
Banat v. Commissioner, 80 F. App’x 705 (2d Cir. 2003) – The 2nd Circuit upheld $2,000 in sanctions against a taxpayer because his argument that “the payment of income taxes was voluntary” was “contrary to well-established law and thus was frivolous.”
United States v. Gerads, 999 F.2d 1255 (8th Cir. 1993) – the court stated that the “[taxpayers’] claim that payment of federal income tax is voluntary clearly lacks substance” and imposed sanctions in the amount of $1,500 “for bringing this frivolous appeal based on discredited, tax-protester arguments.”
Wilcox v. Commissioner, 848 F.2d 1007 (9th Cir. 1988) – the court rejected Wilcox’s argument that payment of taxes is voluntary for American citizens and imposed a $1,500 penalty against Wilcox for raising frivolous claims.
United States v. Schulz, 529 F.Supp.2d 341 (N.D.N.Y. 2007) – the court permanently barred Robert Schulz and his organizations, We the People Congress and We the People Foundation, from promoting a tax scheme that helped employers and employees improperly stop tax withholding from wages on the false premise that federal income taxation is voluntary.
Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014) – the court imposed several sanctions of $25,000 against a taxpayer who argued, amongst other frivolous arguments, that “the Internal Revenue Code does not establish any liability for the payment of Federal income tax.”
Other Cases: Schiff v. United States, 919 F.2d 830 (2d Cir. 1990); United States v. Berryman, 112 A.F.T.R.2d (RIA) 2013-6282 (D. Colo. 2013); United States v. Sieloff, 104 A.F.T.R.2d (RIA) 2009-5067 (M.D. Fla. 2009); United States v. Melone, 111 A.F.T.R.2d (RIA) 2013-1369 (D. Mass. 2013); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591(2015); Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014); Horowitz v. Commissioner, T.C. Memo. 2006-91, 91 T.C.M. (CCH) 1120 (2006).
6 September 2018: Is Filing a Tax Return Voluntary? Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary. Proponents of this contention point to the fact that the IRS tells taxpayers in the Form 1040 instruction book that the tax system is voluntary. Additionally, these taxpayers frequently quote Flora v. United States, 362 U.S. 145, 176 (1960), for the proposition that "[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint."
The Law: The word “voluntary,” as used in Flora and in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in sections 6011(a), 6012(a), et seq., and 6072(a) of the Internal Revenue Code. See also Treas. Reg. § 1.6011-1(a).
Any taxpayer who has received more than a statutorily determined amount of gross income in a given tax year is obligated to file a return for that tax year. Failure to file a tax return could subject the non-compliant individual to civil and/or criminal penalties, including fines and imprisonment. In United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986), the court stated that, “although Treasury regulations establish voluntary compliance as the general method of income tax collection, Congress gave the Secretary of the Treasury the power to enforce the income tax laws through involuntary collection . . . . The IRS’ efforts to obtain compliance with the tax laws are entirely proper.” The IRS warned taxpayers of the consequences of making this frivolous argument in Rev. Rul. 2007-20, 2007-1 C.B. 863 and in Notice 2010-33, 2010-17 I.R.B. 609.
Relevant Case Law:
Helvering v. Mitchell, 303 U.S. 391, 399 (1938) – the Supreme Court stated that “[i]n assessing income taxes, the Government relies primarily upon the disclosure by the taxpayer of the relevant facts . . . in his annual return. To ensure full and honest disclosure, to discourage fraudulent attempts to evade the tax, Congress imposes [either criminal or civil] sanctions.”
United States v. Tedder, 787 F.2d 540 (10th Cir. 1986) – the 10th Circuit upheld a conviction for willfully failing to file a return, stating that the premise “that the tax system is somehow ‘voluntary’ . . . is incorrect.”
United States v. Richards, 723 F.2d 646 (8th Cir. 1983) – the 8th Circuit upheld a conviction and fines imposed for willfully failing to file tax returns, stating that the claim that filing a tax return is voluntary “was rejected in United States v. Drefke, 707 F.2d 978, 981 (8th Cir. 1983).”
United States v. Hartman, 915 F.Supp. 1227, 1230 (M.D. Fla. 1996) – the court held that, “The assertion that the filing of an income tax return is voluntary is, likewise, frivolous.” The court noted that I.R.C. § 6012(a)(1)(A), “requires that every individual who earns a threshold level of income must file a tax return” and that “failure to file an income tax return subjects an individual to criminal penalty.”
Other Cases:
United States v. Drefke, 707 F.2d 978 (8th Cir. 1983); United States v. Schulz, 529 F. Supp. 2d 341 (N.D.N.Y. 2007); Foryan v. Commissioner, T.C. Memo. 2015-114, 109 T.C.M. (CCH) 1591 (2015); Jones v. Commissioner, T.C. Memo. 2014-101, 107 T.C.M. (CCH) 1495 (2014).
5 September 2018: Employment Practices Liability Insurance (EPLI) covers companies against claims or lawsuits filed by employees, former employees and employment candidates regarding their employment relationship with an employer. EPLI policies can cover seasonal employees, leased employees and independent contractors. EPLI insurance coverage protects a company, its directors, officers, current and former employees. A company can use EPLI insurance to cover expenses involved in defending against claims or lawsuits related to employment (regardless of the outcome) and EPLI provides indemnification of the employer if the case is settled or a verdict is obtained against the employer. EPLI insures against claims of discrimination (based on age, sex, race, religion, color and national origin), sexual harassment claims, wrongful termination (including constructive discharge and retaliatory discharge), infliction of emotional distress and breach of contract, violation of the Family Medical Leave Act or other leave laws. Additionally, some policies contain a catch-all category to provide coverage for claims of discrimination based on protected categories (e.g., sexual orientation) that are not covered under federal discrimination statutes, but may be covered by state or local law. For more information call David Selig directly at (212) 974-3435
4 September 2018: The U.S. Department of the Treasury and the Internal Revenue Service issued proposed regulations providing rules on the availability of charitable contribution deductions when the taxpayer receives or expects to receive a corresponding state or local tax credit. The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive. For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction. The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. A taxpayer who makes a $1,000 contribution to an eligible entity is not required to reduce the $1,000 deduction on the taxpayer’s federal income tax return if the state or local tax credit received or expected to be received is no more than $150.
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