Here’s a question:
Would you file a tax return if you have no income – or
minimal income - to report?
I would if there was a refund.
I also lean to filing if one has a history of tax
filings.
The former is obvious, unless the incremental cost of filing
the return is more than the refund.
The latter is because of my skepticism. I do not want
a letter from the IRS stating they have not received a tax return for
name-a-year. Granted, the issue should be easily resolved, but I have lost
track of how many should-be’s have turned out to not-be.
Another reason is a rerun of Congress’ decision to automatically send advance payments back in 2021 – specifically, the child tax credit.
You were ahead of the game by having filed a prior year return.
Ruben Varela filed a 1040EZ for 2017. It showed a
refund of $1,373.
OK.
Ruben attached four Forms 4852 Substitute for Form
W-2.
This form is used when an employer fails to send a W-2, among other situations. It happens and I see one every few years. But four …? That is odd.
The 4852’s that Ruben prepared showed zero wages.
And the $1,373 included Social Security and Medicare
taxes., taxes which are not refundable.
Ruben, stop that yesterday. This is common tax
protestor nonsense.
Let’s read on. There
was third party reporting (think computer matching) for wages of $11,311 and
cancellation of indebtedness income of $1,436.
Not surprisingly, the IRS considered it a protest filing and assessed a Section 6702(a) penalty.
§ 6702 Frivolous tax submissions.
(a) Civil
penalty for frivolous tax returns.
A person shall pay a penalty of $5,000 if-
(1) such person files what purports to
be a return of a tax imposed by this title but which-
(A) does
not contain information on which the substantial correctness of the
self-assessment may be judged, or
(B) contains
information that on its face indicates that the self-assessment is
substantially incorrect, and
(2) the
conduct referred to in paragraph (1) -
(A) is
based on a position which the Secretary has identified as frivolous under
subsection (c) , or
(B) reflects a desire to delay or impede the administration of Federal tax laws.
That caught
Ruben’s attention, and he disputed the penalty. On to Tax Court they went.
How can I owe a penalty if there was NO TAX, argued Ruben.
On first impression, it seems a reasonable argument.
But this is tax. Let’s look at that Code section again.
Such
person files …. OK
What
purports to be a tax return … OK
Does not contain information on
which the substantial correctness …
?
Let’s talk about this last one. The Tax Court has a history
of characterizing “zero” W-2s as both substantially incorrect and not
containing sufficient information allowing one to judge the self-assessment of
tax.
We have a third “OK.”
Back to Section 6702.
Is there any reference in Section 6702 to whether the
return did or did not show tax due?
I am not seeing it.
The Court did not see it either.
They upheld the Section 6702 penalty.
The IRS wanted more, of course. They also wanted the
Section 6673 penalty.
§ 6673 Sanctions and costs awarded by court
This penalty can be imposed when somebody
clogs the Court in order to impede tax administration. The penalty can be
harsh.
How harsh?
Up to $25 grand of fresh-brewed harsh.
The Court noted they had not seen Ruben Varela before
nor was it aware of him previously pursuing similar arguments. They
declined to impose the Section 6673 penalty, but …
We caution petitioner that a penalty may be imposed in future cases before this Court should he continue to pursue these misguided positions.”
The Court was warning him in the strongest legalese it
could muster.
Our case this time was Ruben Varela v Commissioner,
T.C. Memo 2024-92.
