Thinking about getting creative with the position you take on your return this filing season? Or do you know someone promoting a sure-fire argument that will get you out of paying taxes this year? Frivolous arguments, and those asserting them, have been around for a long time and will likely certainly continue. However, coinciding nicely with the start of the 2008 filing season, the IRS recently issued a reminder to taxpayers about the penalties for taking frivolous positions on a return (IR-2008-8, Notice 2008-14), along with a laundry list of frivolous arguments that taxpayers continue to assert, and the IRS continues to reject. The IRS has also uncovered a few new frivolous positions as well.

Caution. You should pay close attention to the frivolous positions enumerated by the IRS. You could be subject to a penalty up to $5,000 for filing a return taking a frivolous position. Many of these positions are peddled by scam artists and some are even marketed by so-called tax professionals. Ultimately, it is the taxpayer who is responsible for the accuracy of his or her tax return.

Common frivolous arguments

Some typical frivolous positions that taxpayers continue to assert include:

• Federal income taxes are unconstitutional;
• Paying taxes is voluntary or optional;
• Only certain types of income are subject to tax;
• Only certain types of individuals are subject to tax, such as employees of the federal government;
• Federal Reserve Notes are not taxable;
• A taxpayer’s wages are excluded from Social Security taxes if he or she waives their right to receive Social Security benefits; and
• A taxpayer can lawfully avoid paying income tax by sending income offshore, such as by depositing income into a foreign bank account.

New frivolous arguments

Additionally, the IRS identified four new frivolous positions that, if taken, could subject the taxpayer to penalties up to $5,000. They are:

• Claiming a nonexistent “Mariner’s Tax Deduction” to deduct meals as a business expense for individuals employed onboard a ship;
• Misusing or excessive use of fuel credits under Code Sec. 6421, which is limited to gasoline used in an off-highway business use;
• Claiming that taxes are owed only by persons with a fiduciary relationship to the U.S. or the IRS; and
• Wrongfully asserting that the Ninth Amendment exempts those with religious or other objections to military spending from paying taxes.

Increased penalties

In 2006, Congress increased the penalty for filing frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a return or makes another specified submission and any part of that submission is based on a position that the IRS has identified as frivolous.

If you’ve been contacted by a promoter peddling any one of these or another scam, let us know.  We’ll help you understand why these arguments are frivolous and help you avoid any penalties.

(Notice 2008-14; IR-2008-8)