Sunday, March 9, 2014
Not Cracking The Code
We have picked up two or three nonfiler clients this season. By itself, this does not overly concern me, although there are nasty tax traps concerning refunds and overpayments for nonfiled years. Did you know, for example, that – if you go long enough without filing – the IRS will not refund your overpayment? Nonetheless, one files, pays tax due with the IRS and carries on.
Then there is a subcategory of nonfilers that could be referred to as protestors. I have little patience for those. I recently picked up a corporate tax audit client, and it is proving to be a very difficult examination. There are several reasons, but I believe a key reason is that one of the owners may be walking this line.
I am looking at a Tax Court case decided last month: Waltner v Commissioner. This is a protestor case, and it is a bit unusual. In general, courts have given protestors short patience. This time the court took the time to go through the arguments and address them one by one.
Have you hear about Peter Hendrickson? He is a protestor himself, and he wrote a book titled Cracking the Code. It appears that Waltner studied Hendrickson closely, as the techniques he used follow the book’s recommendations.
The case concerns Mr. Waltner’s 2008 individual tax return, in which he reported zero wages, an IRA distribution, a student loan interest deduction and home mortgage interest. All in all, it came down to zero tax liability, which is understandable when you report zero wages.
Mind you, he received three W-2s, but Waltner submitted Forms 4852 (Substitute for Form W-2), reporting zero wages but showing income tax withheld. He also received a Form 1099-B (Proceeds from Broker), but crossed-out proceeds of $5,000 and inserted zero. He then wrote the following text:
This correcting Form 1099-B is submitted to rebut a document known to have been submitted by the party identified above as “Payer” and “Broker” which erroneously alleged a payment to the party identified above as …. of “gross proceeds” in connection with a “trade or business.” Under the penalty of perjury, I declare that I have examined this statement and to the best of my knowledge and belief, it is true, correct and complete.”
The IRS was having none of this and sent a letter requesting a corrected return. The IRS otherwise was going to assess a frivolous submission penalty of $5,000.
He didn’t. They did. Then they issued a notice of intent to levy.
Waltner requested a Collection Due Process hearing, submitting a 49-page brief.
COMMENT: Trust me, 49 pages is impressive.
So the Appeals officer got to read the following:
· Waltner was not “an officer, employee or elected official of the United States”
· He was “never an officer of a corporation”
· He “did not receive Wages from any source”
· He "did not work for or receive any pay from an Employer or American employer”
· He “was not engaged in Employment”
· He “was not an Employee”
· He “was not engaged in Self-employment”
· He “was not a citizen or resident of the District of Columbia or any territory or possession of the United States”
· He “was never incorporated in Washington, D.C. or worked for any company who incorporated in Washington, D.C.”
· He “was not a governmental unit or agency or instrumentality thereof, or a United States Person”
In addition to not understanding the rules for capitalization in the English language, he appears to be flying the tax protestor flag.
The Appeals officer warned him about frivolous arguments. Waltner did not back down. The IRS assessed him. Waltner then filed with the Tax Court.
It took months to go before the Court, during which time the two parties filed 24 motions, resulting in the Court issuing 22 orders. The maneuverings defy belief:
· The IRS moved for admissions, meaning they wanted to know Waltner’s reasoning for the substitute W-2s. The Court, being a good sport, issued a 39-page order reviewing 44 requests for admissions and 83 supplemental requests.
· Waltner responded with boilerplate language but not otherwise addressing the issues under discovery.
· The IRS responded with a 993-page request for admissions.
· Waltner filed a motion for protective order delaying discovery.
· The IRS filed an objection. The Court accepted some and dismissed some.
· Less than a month later Waltner filed a motion to compel stipulation. The motion was filed under an arcane procedure known as Rule 9(f).
· The IRS responded, so the motion was discharged.
· The IRS filed a motion to compel responses to interrogatories, which the Court granted.
· Waltner filed a motion for reconsideration, which the Court denied.
· Waltner sought an extension to respond to the interrogatories, which the Court granted.
· Waltner never responded to the interrogatories. Instead he paid the $5,000 fine.
· Waltner filed to have the IRS answer interrogatories, to which the IRS filed objection.
· The IRS responded to the interrogatories. The Court found some acceptable and others not.
· The IRS filed for supplemental information from Waltner.
· Waltner filed a motion for reconsideration.
Do you see the game being played here? Rather than provide arguments, Waltner is neck-deep in Tax Court procedural minutiae. No wonder the Courts hate protest cases.
When all is said and done, Waltner lost and the IRS requested the Court to apply a $25,000 Section 6673 penalty.
The Court instead went on the discuss Cracking the Code, noting how Waltner’s arguments and techniques mirror the book. Here are some gems, for example:
· The federal government has legislative authority over only the District of Columbia and U.S. territories.
· The Revenue Act of 1862 imposed a 3% tax only on federal employees.
· Federal direct taxes which affect citizens of the several states must be apportioned (a position which predates the 16th Amendmnet).
· Remuneration for work is not profit and is therefore not taxable.
You get the idea.
The court could have assessed a $25,000 penalty for wasting its time, but it decided instead to impose a $2,500 penalty, adding:
Mr. Waltner has other matters pending in this Court in which he is asserting arguments similar to those presented in this case, and he has now been cautioned in both an order and this opinion. We hope that he will heed the warning.”
The Court is allowing Waltner to back down, although I am not optimistic that he will.
There are any number of reasons for not filing. There can be illness, death, emotional collapse, for example. The IRS will mitigate if not abate penalties in many cases. Protest is not one of them. This is a bad street late on a dark night, and nothing good will be found there.