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.
A friend mentioned that the William Wallace Lear letter challenging the commissioner’s authority to prosecute non-filers stops the IRS action. How does that work?
I vaguely remember hearing about a William Wallace letter, and may even have read it but I can’t recall the gist of it at the moment. As far as whether any letter questioning the commissioner’s authority would prevent the Service from going after a non-filer, I doubt there is such a letter. However, because the IRS simply can’t go after every non-filer, and there are millions of them, some may get the impression that it was because of a letter. I’d love to see a copy of the letter you are talking about.
What can be done about the IRS filing a lien with the type of tax owed being listed as 1040? I have to assume that they are meaning 26USC1040, as form 1040 doesn’t impose a tax
Hello Daryl,
While you are quite correct that F1040 doesn’t impose a tax, the use of the form number is a subtle indication that your liability is a result of your having filed a 1040 (if you did). Alternatively the Service claims it can file a Substitute for Return for you for a 1040 and impose a liability. The process is fraught with fraud and deception and is unlikely to be legal, but there it is. No federal or state court will give you relief based on any of the many defects in the federal “notice of lien” scheme. That being said, there are sometimes way to have liens removed, and sometimes they just don’t matter. I would need some details about your case to be able to comment. You can contact me by email if you like.
Nothing particular to say, except what is most important: thank you for all you’ve done over the years.
Thank you so much.
I agree with Mr. Gardner
Thank you.
Very interesting. I filed four years, 2001 – 2004 the CTC way and was indicted 7 years later. Found guilty and served 36 most and my wife received the same and was deported to England after iving in Texas for 60 years. Could this information be of any help for us. We are now living in London. I’m 72 and she is 65 and would like to come home.
Hello Mr. Walden, I’m sorry to hear about your situation. I do not see how this could change anything for you. I’ll contact you by email with further remarks.
My wife’s CALSTRS retirement acct. was levied Jan 1, 2018 & is still being levied the 1st of ea. month in the amount of $3107.39. as claimed by an IRS letter to us in Nov. 15, 2017. The total amount levied by IRS is $115K, & will continue until the agency gets the full amount in it’s coffers.
We have written many letters to the agency regarding IRC sec. 83 (a), regarding how gross income is viewed by IRS and the “excess” of which is “actually gross income” and the agency keeps ignoring the letters with no response!
This amount is extremely taxing ea. mo. as we struggle to keep the mortgage pmts. made, let alone trying to stay out of foreclosure. What do you suggest we do to stop this “agency tirade” on her retirement account. I guess tax court is the way to go? Or is there another way to stop this monthly “EXTORTION!” Thanks Lysander for taking time to read this note.