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.
