The IRS may no longer penalize courtesy copies of frivolous returns. In recent years the IRS has become heavy handed in its application of “Frivolous Return Penalties” under I.R.C. Sec. 6702. The  penalty is $5,000 for submitting a return that meets any of the published criteria for a frivolous return. And often, for simply meeting unofficial criteria that the IRS has cooked up in its Internal Revenue Manual. Copies of returns frequently receive penalties also.

Penalizing Copies of Original Returns

The Tax Court in Kestin v Commissioner recently ruled that the IRS may not penalize courtesy or reference copies of frivolous returns. This was a case where the petitioner had already lost on the question of whether her original 1040X return was frivolous in a partial summary judgment decision. The petitioner also failed to show up at the trial. Judge Gustafson, the Court’s stickler for procedure, ordered briefs anyway. That’s when Lysander became involved with coaching Ms. Kestin on her brief, and rehabilitated her from tax protester to procedural technician.

CtC Returns

Ms. Kestin’s returns follow the recommendations and writings of Peter E. Hendrickson in his book, Cracking the Code, the Fascinating Truth About Taxation in America.  Rightly or wrongly, such returns are often targets of Sec. 6702 penalties.

CtC returns are particularly problematic in that they raise no argument on the official list of prohibited arguments found here. Nevertheless, in the U.S. Tax Court they are frivolous, and the IRS has even made a special list to augment the official list of forbidden arguments to be sure it can penalize CtC returns.

Warning Letters

The Service is not required to, but as a matter of policy sends a warning letter, (Ltr 3176C and similar) to people who submit forbidden returns. The letter offers 30 days in which to “correct” the frivolous return. That warning letter often generates return correspondence to which the filers attach copies of the original return for the convenience and easy reference of the IRS. The IRS has gotten into the habit of penalizing every copy of the offending return they receive. In the Kestin case, she received an additional six penalties for copies of the original return she had attached to her correspondence.  The Court disallowed those penalties.

The Court’s opinion and decision in the Kestin case is a T.C. Opinion that is precedential, i.e. it means the decision applies to all future cases, not just to Ms. Kestin, as a T.C. Memo would. The IRS may no longer penalize courtesy copies of frivolous returns.

Lysander

Lysander Venible is the author of "On Your Own in Tax Court," a book about how to save your shirt in U.S. tax court. He has been engaged with the Service for over 10 years both administratively and in tax court.

If you have questions, topics or a situation you'd like to discuss, his phone and email are at the top of every page.

Lysander is not an attorney and it is not his intent to offer legal advice.
Lysander