n-05-30.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

1
Part III - Administrative, Procedural, and Miscellaneous

Frivolous Arguments to Avoid When Filing a Return or Claim for Refund

Notice 2005-30

SECTION 1. INTRODUCTION.
As April 15 approaches, taxpayers are reminded to steer clear of abusive tax-
avoidance schemes that purportedly allow them to reduce or eliminate taxes. If an idea
to save on taxes seems too good to be true, it probably is.
Many abusive tax-avoidance schemes are based on frivolous arguments that the
Service and the courts have repeatedly rejected. These schemes are often sold by
promoters for a substantial fee, and may be sold over the Internet, through
advertisements in newspapers and magazines, at conferences and seminars (including
conferences for professional groups such as doctors or dentists), and through
recommendations of friends or acquaintances who have learned about these schemes.
Section 2 of this Notice sets out some of the most common frivolous arguments
used by these abusive tax-avoidance schemes. The Service is committed to identifying
taxpayers who attempt to avoid their tax obligations by using schemes based on these
and other frivolous arguments. Frivolous returns and other documents submitted to the
Service are processed through its Frivolous Return Program. The Service also reviews

2
other documents that make frivolous arguments to determine whether the individuals
who submit these documents have filed required tax returns and paid all taxes due for
previous years.
Section 3 of this Notice identifies potential civil and criminal penalties. Taxpayers
who engage in abusive tax-avoidance schemes will be liable for unpaid taxes and
interest. In addition, the Service will impose civil and criminal penalties against
taxpayers where appropriate. The Service also will determine appropriate penalties and
consider taking other appropriate action against persons who promote these schemes
and who prepare frivolous returns based on those schemes.
SECTION 2. COMMON FRIVOLOUS ARGUMENTS.
This section sets out some of the most common frivolous arguments used by
taxpayers to avoid or evade tax.
• “A taxpayer can avoid tax by filing a return that reports zero income and
zero tax liability.” All taxpayers who receive more than the statutory
minimum amount of gross income, from whatever source derived, must file
returns and pay tax. No law, including the Internal Revenue Code, permits a
taxpayer who has received wages or other income to file a return with zero
income and zero tax liability. If a taxpayer has received income subject to
federal tax, a return showing only zeroes for income and tax liability is not a
valid return. Further, inclusion of the phrase “nunc pro tunc” or other legal
jargon on an income tax return does not serve to validate an otherwise
improper return.

• “A taxpayer may avoid income tax by referring to a separate ‘straw man’
entity created by the use of the taxpayer’s name in all capital letters in
government documents.” No authority supports the claim that individuals
may avoid their federal income tax obligations based on “straw man”
arguments. The use of all uppercase letters when including an individual’s
name in government documents has no significance whatsoever.

• “Wages are not taxable income, pursuant to section 1001, because

3
taxpayers have basis in their labor equal to the fair market value of the
wages they receive; thus, there is no gain to be taxed.” All compensation
received, no matter what the form of payment, must be included in gross
income under section 61. This includes salary or wages paid in cash, as well
as the value of property and other economic benefits received from services
performed or to be performed in the future. Section 1001 governs gain or
loss on the disposition of property, and has no application to compensation
for services.

• “The 16
th
Amendment is invalid because it contradicts the original
Constitution, was not properly ratified, and lacks an enabling clause.”
The Sixteenth Amendment to the U.S. Constitution, which authorizes the
income tax, was properly ratified by the states and is valid. Further, the
argument that the Sixteenth Amendment is invalid due to the lack of an
enabling clause is without merit because Congress has the power to lay and
collect taxes pursuant to Article 1, Section 8, Clause 18 of the Constitution.

• “A taxpayer can make a ‘claim of right’ to exclude the cost of his labor
from income.” There is no “claim of right” doctrine under any federal law,
including the Internal Revenue Code, that permits a taxpayer to deduct or
exclude from gross income the value of his labor.

• “Only income from a foreign source is taxable under section 861.”
Sections 861 through 865 do not exclude income from taxable income. In
particular, nothing in these sections or the Treasury regulations provides that
only income earned from certain foreign sources is subject to U.S. tax.

• “I am not a ‘citizen’ or a ‘person’ within the meaning of the Internal
Revenue Code.” A citizen of any one of the 50 States (e.g.
, New York,
California) of the United States or of the District of Columbia is also a citizen
of the United States and is subject to federal tax.

• “Residents of States, such as New York or California, are residents of a
foreign country and therefore not subject to U.S. income tax.” Under its
specific conditions and limitations, section 911 permits a taxpayer to elect to
exclude income from U.S. taxable income only when the taxpayer earns
income abroad and resides outside the geographic boundaries of the United
States. For purposes of section 911, States (e.g.
, New York or California),
the District of Columbia, and Commonwealths and Territories of the United
States (e.g.
, Johnston Atoll) are not foreign countries.

• “A taxpayer can escape income tax by putting assets in an offshore

4
bank account.” A citizen or resident of the United States cannot use an
offshore financial arrangement (such as a foreign bank or brokerage account,
or a credit card issued by a foreign bank) to avoid his federal tax obligations.
Taxpayers are required to disclose foreign financial accounts to the Treasury
Department and may face civil and criminal penalties if they fail to do so.

• “A taxpayer can eliminate tax by establishing a ‘corporation sole.’” A
taxpayer cannot avoid income tax by establishing a “corporation sole.” A
corporation sole may be used only by a legitimate religious leader for specific,
limited purposes relating to the religious leader’s office.

• “A taxpayer can place all of his assets in a trust to escape income
tax while still retaining control over those assets.” A taxpayer who
places assets in a trust but retains certain powers or interests over the assets,
including the power to control the beneficial enjoyment of the assets, is
treated as the owner of the assets for federal tax purposes and is subject to
tax on the income from those assets.

• “A taxpayer can deduct amounts paid to maintain his household by
establishing a home business.” Business expenses, including expenses
related to a home-based business, are not deductible unless the expenses
relate to a legitimate profit-seeking trade or business. Promoters of home-
based business schemes improperly encourage taxpayers to claim household
expenses as business expense deductions when the purported home-based
business is not a legitimate trade or business.

• “Nothing in the Internal Revenue Code imposes a requirement to file a
return.” Section 6011 expressly authorizes the Service to require, by
Treasury regulation, the filing of tax returns. Section 6012 identifies persons
who are required to file income tax returns. Under Treasury regulations,
taxpayers who receive more than the statutory minimum amount of gross
income must file income tax returns. Taxpayers also are required to pay any
tax owed.

• “Filing a tax return is ‘voluntary.’” Some people mistake the word
"voluntary" for ”optional” – but filing a tax return is not optional for those who
meet the law's minimum gross income requirements. The word "voluntary,"
as used in IRS publications and elsewhere, refers to the fact that the U.S. tax
system is a voluntary compliance
system. This means only that taxpayers
themselves determine the correct amount of tax and complete the appropriate
returns, rather than have the government do this for them as is done in some
other countries. This system of self-reporting does not make the filing of tax

5
returns or the payment of tax voluntary. For those who do not comply with
this system and fail to self-report their tax liability, the tax law authorizes
various enforced compliance measures.

• “Because taxes are voluntary, as an employer, I don’t have to withhold
income or employment taxes from my employees.” Every taxpayer is
responsible for completing and filing required returns and paying the correct
amount of tax. An employer is required by law to withhold income and
employment taxes from salary and wages paid to employees. Employers
also must deposit the amounts withheld with the Service.

• “A taxpayer can refuse to pay taxes if the taxpayer disagrees with the
government’s use of the taxes it collects.” No law, including the Internal
Revenue Code, permits a taxpayer to avoid or evade tax obligations on the
grounds that the taxpayer does not agree with the Government’s past or
possible future use of the taxes collected.

• “A taxpayer can escape income taxes or the tax system by submitting a
set of documents in lieu of a tax return.” Taxpayers must file income tax
returns using the forms prescribed by the Service. No law, including the
Internal Revenue Code, permits taxpayers to submit a document or series of
documents to remove themselves from the income tax system.

• “A taxpayer can avoid tax by filing a return with an attachment that
disclaims tax liability.” A return with an attached disclaimer of tax liability is
not a valid tax return under the law.

• “A taxpayer can avoid tax by filing a return with an altered penalties of
perjury statement.” Alterations to an income tax return or to the penalties of
perjury statement may nullify a return.

• “Certain taxpayers can claim a ‘reparations tax credit’ to right wrongs
done in the past.” No law, including the Internal Revenue Code, permits a
“reparations tax credit.”

• “By purchasing equipment and services for an inflated price, a taxpayer
can use the Disabled Access Credit to reduce tax or generate a refund.”
The section 44 Disabled Access Credit, which is limited to expenses for
specific medical equipment needed to make a business accessible to
disabled individuals, may only be claimed for amounts actually paid by a
taxpayer running a legitimate business. Promoters of this scheme improperly
offer to sell equipment or services at inflated prices in order to generate a

6
large credit. Taxpayers participating in this scheme, however, ultimately are
not required to pay, and do not pay, the entire price stated in the sales
contract.

• “Under section 3121 taxpayers can deduct the amount of Social
Security taxes paid or get a refund of those taxes.” The Internal Revenue
Code imposes Social Security tax on wages as defined in section 3121.
Aside from the narrow exception for a religious exemption under section
3127, a taxpayer may not exclude wages from Social Security taxation on the
basis that the taxpayer is waiving the right to receive Social Security benefits,
and the Code does not authorize a deduction for, or refund of, Social Security
taxes paid.

• “A taxpayer may sell (or purchase) the right to claim a child as a
qualifying child for purposes of the EIC.” A taxpayer may not purchase or
sell the right to claim a child as a qualifying child for purposes of the earned
income credit (EIC). In order to claim a child as a qualifying child for
purposes of the EIC, the child must meet specific relationship, residency and
age requirements.

The Service and the courts have repeatedly rejected these arguments and
variations on them, and have rejected numerous other tax avoidance schemes and
frivolous arguments used by taxpayers to avoid or evade taxes.
SECTION 3. CIVIL AND CRIMINAL PENALTIES.
Civil and criminal penalties may apply to taxpayers who make frivolous
arguments. Potentially applicable civil penalties include: (1) the section 6651 additions
to tax for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a
return; (2) the section 6662 accuracy-related penalty, which is equal to 20 percent of the
amount of taxes the taxpayer should have paid; (3) the section 6663 penalty for civil
fraud, which is equal to 75 percent of the amount of taxes the taxpayer should have
paid; (4) a $500 penalty under section 6702 for filing a frivolous income tax return; and
(5) a penalty of up to $25,000 under section 6673 if the taxpayer makes frivolous

7
arguments in the United States Tax Court.
Taxpayers who take frivolous positions also may face criminal prosecution for:
(1) attempting to evade or defeat tax under section 7201, for which the penalty is a
significant fine and imprisonment for up to 5 years; (2) willful failure to file a return under
section 7203, for which the penalty is a fine of up to $25,000 and imprisonment for up to
one year; and (3) making false statements on a return, statement, or other document
under section 7206, for which the penalty is a significant fine and imprisonment for up to
3 years.
Persons, including return preparers, who promote frivolous positions and those
who assist taxpayers in claiming tax benefits based on frivolous positions may face
penalties and may be enjoined by a court pursuant to sections 7407 and 7408.
Potential penalties include: (1) a $250 penalty under section 6694 for each return or
claim for refund prepared by an income tax return preparer who knew or should have
known that the taxpayer’s position was frivolous (or $1,000 for each return or claim for
refund if the return preparer’s actions were willful, intentional or reckless); (2) a penalty
under section 6700 for promoting abusive tax shelters; (3) a $1,000 penalty under
section 6701 for aiding and abetting the understatement of tax; and (4) criminal
prosecution under section 7206, for which the penalty is a significant fine and
imprisonment for up to 3 years for assisting or advising about the preparation of a false
return, statement or other document under the internal revenue laws.
SECTION 4. EFFECT ON OTHER DOCUMENTS.
Notice 2004-22 is modified and superseded.

8
SECTION 5. ADDITIONAL INFORMATION.
Other information about frivolous tax positions is available on the Service website
at www.irs.gov.
The principal author of this notice is the Office of Associate Chief Counsel
(Procedure & Administration). For further information regarding this notice, contact that
office at (202) 622-7800 (not a toll-free call).