What Are Frivolous Tax Arguments?

The United States tax system allows taxpayers to dispute the amount of tax they owe through good-faith disagreements. However, a separate category of arguments exists outside of legitimate legal challenges, known as frivolous tax arguments. These are baseless claims that have been consistently rejected by the legal system and often rely on misinterpretations of the Constitution, twisted legal terms, or conspiracy theories. Engaging with these arguments can lead to significant financial penalties and legal trouble.

Defining a Frivolous Position

The Internal Revenue Service (IRS) and U.S. courts define a frivolous position as an argument that is “patently improper” with no basis in law or fact. This determination is based on a long history of court rulings that have systematically dismantled these arguments. The core of the definition rests on the idea that the position has been so thoroughly discredited that it cannot be considered a reasonable basis for a tax dispute.

This standard is not meant to stifle legitimate disagreement. Taxpayers have the right to contest their tax liabilities, and there are many complex areas of tax law where reasonable people can differ on interpretation. A frivolous position is distinct from a legitimate but unsuccessful legal argument. The distinction lies in whether the argument has a plausible legal foundation, even if that foundation ultimately proves to be incorrect in a specific case.

The IRS maintains a non-exclusive list of positions it has identified as frivolous in official publications, such as IRS Notice 2010-33. Relying on any of these listed positions, or any other argument that is similarly groundless, is the trigger for the IRS to classify a tax return or submission as frivolous.

Common Frivolous Arguments

The range of frivolous arguments is extensive, but they often fall into several categories. Promoters of these schemes may target taxpayers with misleading claims about secret legal loopholes or constitutional exemptions.

Constitutional Arguments

A frequent category of frivolous arguments involves misinterpretations of the U.S. Constitution. These have been summarily dismissed in every instance by the courts. Common arguments include:

• The claim that the Sixteenth Amendment, which authorizes the income tax, was never properly ratified.
• The assertion that filing a tax return is optional because the system is based on “voluntary compliance.” In reality, this term refers to self-assessing tax liability, not a choice to pay taxes.
• The belief that the First Amendment’s protection of religious freedom exempts individuals from paying taxes that violate their conscience.
• The use of the Fifth Amendment’s right against self-incrimination to avoid filing a tax return altogether.
• The argument that IRS summonses for financial records constitute an unreasonable search and seizure under the Fourth Amendment.
• The claim that the income tax is a “taking” of property without due process under the Fifth Amendment.

Arguments Regarding the Nature of Income

Another major category of frivolous arguments centers on redefining income to avoid tax. These arguments have been universally rejected by the courts. They include:

• The claim that wages, salaries, and tips are not income because they are an equal exchange of labor for compensation.
• The position that only foreign-source income is taxable and that income earned within the United States is exempt.
• The attempt to avoid tax by claiming one is not a “person” or “employee” as defined by the Internal Revenue Code.
• The filing of a “zero return,” which reports zero income and seeks a refund of all withheld taxes, accompanied by a statement of frivolous arguments.

Fictional Financial Instrument Arguments

A third category involves using fake financial instruments to pay tax debts. These schemes often involve the creation of “straw man” theories, where proponents claim the U.S. government controls a secret bank account for every citizen. One such scheme is the “redemption” argument, which posits that taxpayers can draw on this secret account using bogus documents like “sight drafts” or “bills of exchange” to pay their taxes.

Another variation involves the fraudulent use of Form 1099-OID (Original Issue Discount). In this scheme, a taxpayer files a fake Form 1099-OID claiming they received a large amount of income that was already taxed at a high rate. They then file a tax return seeking a refund for the supposed over-withholding. The IRS has identified these as illegal tax evasion schemes and actively prosecutes those who participate.

Applicable Civil Penalties

The Internal Revenue Code provides the IRS with specific tools to penalize individuals who make frivolous tax arguments. These civil penalties are designed to deter taxpayers from clogging the tax system with baseless claims and to compensate the government for the administrative costs of dealing with them. The penalties are applied in addition to any underlying tax, interest, and other accuracy-related penalties.

The most direct penalty is $5,000 for filing a frivolous tax return. This is imposed if a taxpayer submits a return based on a position the IRS has identified as frivolous or that shows a desire to delay or impede tax administration. The simple act of filing a return containing a frivolous argument is enough to trigger the penalty, even if there is no understatement of tax.

This $5,000 penalty also applies to other specified submissions containing frivolous positions, such as requests for Collection Due Process hearings, installment agreements, and offers in compromise. If a frivolous argument results in an underpayment of tax, an accuracy-related penalty of 20 percent of the underpayment may apply. This can increase to 75 percent if the underpayment is due to fraud.

Finally, taxpayers who advance frivolous arguments in court can face additional penalties. The U.S. Tax Court is authorized to impose a penalty of up to $25,000 if it determines a taxpayer’s position is frivolous or groundless, or that the proceeding was started primarily for delay.

The IRS Response and Examination Process

The IRS has a systematic process for addressing submissions that contain frivolous arguments, handled by its Frivolous Return Program (FRP). The goal of this program is to stop frivolous claims early, prevent improper refunds from being issued, and assert applicable penalties. The process begins when IRS screening procedures flag a return that exhibits characteristics of a frivolous argument.

Any IRS employee who identifies a potentially frivolous submission during routine processing is required to refer it to the FRP for evaluation. If the submission is deemed frivolous, the IRS will not process any associated refund claim. The IRS then sends a letter to the taxpayer identifying the frivolous position and explaining why it is incorrect.

This letter gives the taxpayer 30 days to file a valid return or withdraw the submission. If the taxpayer does not comply, the IRS will assess the $5,000 frivolous return penalty and any other applicable taxes and penalties. The agency will then calculate the correct tax liability and issue a notice of deficiency, which gives the taxpayer the right to challenge the determination in U.S. Tax Court.

Official IRS Resources and Publications

The IRS provides several official resources to help taxpayers understand and avoid frivolous tax arguments. These documents are the primary source of information on this topic and serve as a clear guide for taxpayers who may be confused by misinformation. Key resources include:

• “The Truth About Frivolous Tax Arguments”: A comprehensive publication that describes and refutes dozens of common frivolous positions, citing relevant court cases that have rejected them.
• IRS Notice 2010-33: This notice provides the official, though not exhaustive, list of over 40 positions that the IRS has identified as frivolous, the use of which is a direct trigger for the $5,000 penalty.
• The “Dirty Dozen” List: An annual campaign that raises public awareness about common tax-related scams, which regularly includes warnings about frivolous arguments.