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A Look At How And Why The IRS Is Perpetrating An Elaborate Hoax About "Frivolous Return Penalties"

The creation of a fake list of "frivolous positions" proves the truth of what the subterfuge is meant to conceal and suppress.

THE IRS HAS BEEN CAUGHT perpetrating a brazen "frivolous return penalty" hoax in an effort to discourage CtC-educated tax returns and refund claims. Here's how it works:

Pursuant to 26 U.S.C. § 6702, tax returns which manifest certain "frivolous positions" can be subject to a $5,000 "frivolous return" penalty.

The "position" specs appear in the law as follows:

26 USC § 6702 - Frivolous tax submissions

(a) Civil penalty for frivolous tax returns

A person shall pay a penalty of $5,000 if—

(1) such person files what purports to be a return of a tax imposed by this title but which—

(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or

(B) contains information that on its face indicates that the self-assessment is substantially incorrect, and

(2) the conduct referred to in paragraph (1)—

(A) is based on a position which the Secretary has identified as frivolous under subsection (c), or

(B) reflects a desire to delay or impede the administration of Federal tax laws.


(c) Listing of frivolous positions

The Secretary shall prescribe (and periodically revise) a list of positions which the Secretary has identified as being frivolous for purposes of this subsection. The Secretary shall not include in such list any position that the Secretary determines meets the requirement of section 6662(d)(2)(B)(ii)(II).

(6662(d)(2)(B)(ii)(II) provides for relief from an "understatement of income" penalty if "there is a reasonable basis for the tax treatment of such item by the taxpayer"- PH.)

Upon the addition of subsection (c) to the law in 2006, the Secretary promptly issued the required list, which has been revised twice since then. The current list (applying to filings since April, 2010) can be seen here (or here, starting on page 609); its predecessor (applying to filings between January, 2008 and April, 2010) can be seen here; and the original (applying to filings between March, 2007 and January, 2008) can be seen here.

UNFORTUNATELY FOR THE IRS, the Secretary's diligence presented it with a problem: CtC-educated returns aren't even remotely "based on a position" on the Secretary's list. (Returns which overtly manifest a desire to impede or delay the administration of the tax laws alternatively qualify for the penalty. But delay and impediment are the last things desired by educated filers; no such expression appears on CtC-educated returns-- typical examples of which can be seen here, here and here; and this is never alleged in regard to CtC-educated returns.)

The fact that CtC-educated returns don't qualify for the frivolous return penalty is a "problem" for the tax agency because it likes to use the penalty threat in efforts at scaring a few educated Americans into reversing themselves and climbing back into their old stall in the "ignorance tax" barn. A few illustrative instances can be seen in the cases discussed here, here and here. The IRS also hopes that rumors of these penalties will discourage Americans who have never read CtC from doing so in the first place and joining the ranks of those represented here.

So, faced with a conundrum insurmountable by legitimate means, the reality-thwarted agency has devised a "work-around". It has created a fake list, on which appears an entry meant to be taken as a CtC-relevant "position".

THE LIST WITH THE FAKE ENTRY appears on the IRS website at this page (at 25.25.10-1 near the bottom of the page). Here is the text of the entry meant to be taken as an expression of "the CtC position" (which will be variously designated on the list as either "44" or "AR"-- every now and then the IRS, perhaps hoping to sow confusion to save it from this exposé, switches from a numeric list to an alphabetic list, in which A = 1, Z = 26, AA =27, and AR = 44):

44. Zero Wages on a Substitute Form: Taxpayer generally attaches either a substitute Form W-2, Form 1099, or Form 4852 that shows "$0" wages or no wage information. A statement may be included indicating the taxpayer is rebutting information submitted to the IRS by the payer. Entries are usually for Federal Income Tax Withheld, Social Security Tax Withheld, and/or Medicare Tax Withheld. An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and IRC 3121", or may include some reference to the company refusing to issue a corrected Form W-2 for fear of IRS retaliation.

As noted, this entry is a complete fabrication. It doesn't appear in the actual official list at all, and never has.

Rather, it merely appears in the "Internal Revenue Manual", and has no legal significance at all.

Marks v. Comm'r, 947 F.2d 983, 986 n. 1 (D.C. Cir. 1991) (holding that "[i]t is well-settled . . . that the provisions of the [Internal Revenue M]anual are directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law" (emphasis added)); see also Valen Mfg. Co. v. United States, 90 F.3d 1190, 1194 (6th Cir.1996); United States v. Horne, 714 F.2d 206, 207 (1st Cir.1983); Einhorn v. DeWitt, 618 F.2d 347, 349-50 (5th Cir.1980).

Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006)

HERE IS THE ACTUAL, official and valid "frivolous Argument 44" from the actual list published by the Secretary:

(44) A taxpayer’s income is not taxable if the taxpayer assigns or attributes the income to a religious organization (a “corporation sole” or ministerial trust) claimed to be tax-exempt under section 501(c)(3), or similar arguments described as frivolous in Rev. Rul. 2004-27, 2004-1 C.B. 625.

Plainly, there isn't even a pretense of a relationship between the fake-list "Argument 44" and the real Argument 44.

Further, not only is the fake-list "position" a false representation of an official listed position, but as will be seen when reading it through with this in mind, it isn't even a "position" at all. The fake-list "Argument 44" is just a description of how forms are filled out. An actual "position" is not WHAT you do, or HOW you do it, it is WHY you did whatever you did.

The preamble to the official "frivolous positions" list is quite clear about this:

I. Purpose

Positions that are the same as or similar to the positions listed in this notice are identified as frivolous for purposes of the penalty for a “frivolous tax return” under section 6702(a) of the Internal Revenue Code and the penalty for a “specified frivolous submission” under section 6702(b). Persons who file a purported return of tax, including an original or amended return, based on one or more of these positions are subject to a penalty of $5,000 if the purported return of tax does not contain information on which the substantial correctness of the self-assessed determination of tax may be judged or contains information that on its face indicates the self-assessed determination of tax is substantially incorrect. Likewise, persons who submit a “specified submission” (namely, a request for a collection due process hearing or an application for an installment agreement, offer-in-compromise, or taxpayer assistance order) based on one or more of the positions listed in this notice are subject to a penalty of $5,000. The penalty may also be applied if the purported return or any portion of the specified submission is not based on a position set forth in this notice, yet reflects a desire to delay or impede the administration of Federal tax laws for purposes of section 6702(a)(2)(B) or 6702(b)(2)(A)(ii).

"Based on one or more of these positions". Clearly, the fake entry 44 in the false list cannot qualify as an actual "frivolous position" regardless of where it is or isn't found. It is not a "position" (on which actions are "based") at all-- it is simply a description of some paperwork and the way it's filled-out.

The official-list preamble continues with a specification by which the purported applicability of any 6702 "frivolous return" penalty can only be based on what appears on the (complete) return itself:

The penalty will be imposed only when the frivolous position or desire to delay or impede the administration of Federal tax laws appears on the face of the return, purported return, or specified submission, including any attachments to the return or submission.

NOTWITHSTANDING ITS ILLEGITIMACY on all these several fronts, the fake-list "Argument 44" is used by the IRS as a pretext for its occasional "assertions" of "frivolous return penalties" against CtC-educated filings. Here's an example of the fake entry being deployed in a transcript as part of this effort (in the center of the highlighted lines, showing as "CVPN (for "civil penalty")-ARG44"):

(See more examples here, here, here, here, here and here.)

SO, THIS BRINGS US BACK TO THE OPENING QUESTION: WHY does the government resort to this noxious little fraud?

Here's a clue: What we DON'T find on either the real or even the fake "frivolous position" list is anything describing the ACTUAL position on which any CtC-educated filing is based-- that the income tax is an excise on privileged activities.

Nor does anything on either list contradict or challenge what might be described as secondary "positions" informing educated filings, such as,

  • "Not every receipt is "income" as that term is meant in the context of the "income tax";

  • "It is possible for 'information returns" to be wrong when characterizing any given payment as "wages", "self-employment income" or as being relevant to the tax under any other label":

  • "One has a right to rebut what one believes to be erroneous assertions of payers regarding the legal character of one's receipts"; and/or that

  • "Tax returns are to be completed using whatever figures the filer believes to be true and accurate".

The implications of the government's silence on these matters in this context is obvious. And to REALLY frame the context, let's not forget that CtC-educated Americans are steadily recovering $billions in improperly collected income tax which used to go into the federal and state treasuries.

Further, the IRS Appeals office has actually admitted outright that CtC-educated returns DON'T qualify for the "frivolous" penalty. See this, too, and the California FTB "frivolous return penalty" victory in the post here.

In June of 2022, the IRS instructed a CtC-educated filer that Form 4852 was the proper instrument to rebut disputed allegations that payments received and reported on a Form 1099-R were tax-relevant, thereby contradicting its "ARG44" pretense that CtC-educated filings are grounds for a "frivolous return penalty". See documentation of that admission and contradiction here.

ALL IN ALL, WHAT WE HAVE HERE is an ugly and deeply corrupt little scam-- but a very revealing one, at the same time (as they always are). Frauds like this are only deployed in efforts to sustain a lie, and so their deployment always emphasizes to the discerning eye the very truth they are meant to conceal.

Still, it makes you want to take a shower and then march on Washington, doesn't it?

AT THE VERY LEAST, it makes you want to forward this article (here is the URL) to everyone you possibly can, right? And especially to journalists (and lawyers)...

And if you're a journalist, it makes you want to publish an article of your own about this, yes?

And then begin digging into the real story concerning CtC, pushing past all the DOJ and IRS bs that has been deployed for well over a decade to keep you from doing so even while the federal and state governments have refunded $billions of improperly-taken income taxes to CtC-educated claimants, yes?

I sure hope so. You won't understand what's at stake until you do that digging, but once you do, you'll smack yourself for not having done it sooner.