IRS Backs Off on “Frivolous Filing” Penalties

If you file a U.S. federal income tax return that is inaccurate or incomplete and you justify this by taking explicit positions that the IRS has ruled to be legally “frivolous,” the agency can hit you with an instant $5,000 frivolous filing penalty.

So, for instance, if you were to take a “black tax credit” or “war tax deduction” on your 1040 form, or if you were to submit a blank form along with a letter claiming that you have a 5th Amendment right not to answer questions about your finances, you might get hit with such a fine.

But several American war tax resisters found that they were getting fined in this way even when they submitted complete and accurate tax returns, just because they accompanied the returns with a letter explaining their reasons for not paying the complete amount shown as due. (Here is some background.) This appeared to be overreaching on the part of the IRS, but it was difficult for war tax resisters to challenge this because the agency demands that you pay the fine before you can appeal it.

So instead of appealing, somebody contacted the Taxpayer Advocate Service about this problem, and one of the program analysts there got on the case. I just learned that the IRS Office of Chief Counsel has issued a memorandum (POSTF‒153168‒12 — “Application of Section 6702 Penalty to Taxpayer Who Files a Return with War Complaint”) that states:

When the taxpayer timely files a correct and complete return, the section 6702 [frivolous filing] penalty should not be assessed based solely on the fact that the taxpayer enclosed a letter with the return explaining why the taxpayer is not paying the self-assessed tax due. If a penalty has been assessed, it should be abated.

And, more explicitly:

If a taxpayer submits a document with a frivolous argument to the IRS, a penalty under section 6702(a) will apply only if the taxpayer files a purported tax return that either does not contain information on which the substantial correctness of the self-assessment may be judged or contains information that on its face indicates that the self-assessment is substantially incorrect. I.R.C. §6702(a)(1). As explained in legislative history, “the penalty could be imposed against any individual filing a ‘return’ showing an incorrect tax due or a reduced tax due, because of the individual’s claim of a clearly unallowable deduction, such as… a ‘war tax’ deduction under which the taxpayer reduces his taxable income or shows a reduced tax due by that individual’s estimate of the amount of his taxes going to the Defense Department budget, etc. In contrast, the penalty will not apply if the taxpayer shows the correct tax due but refuses to pay the tax.S. Rep. No. 97‒494, 97th Cong., 2d Sess. 277–78, reprinted in U.S. Code Cong. & Ad. News. 781, 1024 (emphasis added).

The section 6702 penalty should not be assessed against a taxpayer who encloses with, or attaches to, an otherwise accurate and complete tax return documents articulating frivolous arguments. Congress did not intend for the section 6702 penalty to apply in this limited circumstance. In such circumstances, the return does not contain information insufficient to determine the substantial correctness of the self-assessment, or indicate that the self-assessment is substantially incorrect. Instead, the attachments state the grounds upon which the taxpayer is refusing to pay the properly reported tax.