The ongoing fight against frivolous tax arguments

Editor: Michael J. Mondelli, J.D.

The IRS and courts regularly contend with taxpayers’ theories for not paying tax that clearly are not based on a reasonable understanding and application of law. These arguments and positions are commonly referred to as “frivolous arguments.” To discourage taxpayers from making frivolous arguments, the Tax Court, under Sec. 6673(a), may impose a penalty, either in response to an IRS motion for sanctions or on its own, against taxpayers that make frivolous arguments. Recently, the Tax Court again faced the issue of frivolous arguments in French, T.C. Memo. 2025–57.

Sec. 6673(a)(1) penalty

Sec. 6673(a)(1) authorizes the Tax Court to impose a penalty not in excess of $25,000 whenever it appears that (1) the taxpayer has instituted or maintained proceedings primarily for delay; (2) the taxpayer’s position is frivolous or groundless; or (3) the taxpayer unreasonably failed to pursue available administrative remedies. Under Tax Court precedent, a taxpayer’s position is frivolous or groundless if it is contrary to established law and unsupported by a reasoned, colorable argument for a change in the law (see Takaba, 119 T.C. 285, 294 (2002); Williams, 114 T.C. 136, 144 (2000)).

Background of the French case

Michael and Dawn French filed their 2020 Form 1040, U.S. Individual Income Tax Return, reporting retirement income received by Michael French. Dawn French received wage income and interest payments in 2020, but the couple did not include this income on the return. The Frenches were selected for an IRS examination, during which they submitted a “corrected” Form 1099–INT, Interest Income, in the amount of $0. The IRS issued a notice of deficiency for tax related to the unreported wage and interest income.

In response, the Frenches petitioned the Tax Court for a redetermination. The couple argued that the IRS erred in its determination of their wage and interest income for tax year 2020.

Motion hearing and trial

In a hearing on the IRS’s motion for summary judgment, the Frenches made several frivolous arguments regarding why Dawn French’s wage income was exempt from tax and a frivolous constitutional argument regarding a direct versus an indirect tax. Although the court denied the IRS’s motion and allowed the case to go to trial (so the Frenches could retain counsel), the court “clearly and expressly” warned the taxpayers about making frivolous arguments, noting that it had the discretion to impose a Sec. 6673 penalty if they continued to make the frivolous arguments.

At trial, the Frenches again represented themselves. Despite stipulating to the amount of wage income and interest Dawn French received, they continued to argue that the income was not includible in their gross income, making the same frivolous arguments they had made at the earlier motion hearing.

With regard to Dawn French’s wage income, they argued that a tax on payment for labor is a direct tax that requires apportionment, while a tax on compensation for services or wages is an indirect tax. The Tax Court found that the Supreme Court had rejected this argument in Moore, 602 U.S. 572 (2024). They also argued that wage income is taxable only if it is related to certain activities, and because the IRS did not have “personal knowledge” of Dawn French’s activities at work, it could not tax the related wages. The Tax Court, citing Eisner v. Macomber, 252 U.S. 189 (1920), found that the IRS did not need to know exactly what Dawn French did day to day. The mere fact that she worked for her employer and received payment in exchange for her labor was enough to know that the payments were income under the U.S. tax laws that was includible in the couple’s gross income.

The Frenches also disputed whether the interest they received should be classified as income. The Tax Court concluded that it was fully taxable gross income, citing Landers, T.C. Memo. 2003–300.

Thus, because the Frenches stipulated that Dawn French received the wage income and interest income and had made only frivolous arguments regarding why the income was not subject to tax, the Tax Court held that the income was includible in the Frenches’ gross income.

Frivolous-argument penalty

Finding that the arguments the Frenches put forth at trial regarding Dawn French’s wage and interest income were frivolous, the Tax Court imposed a Sec. 6673 penalty of $1,000.

The court indicated the penalty was warranted because, although the Frenches had been given ample warning by both the IRS and the Tax Court not to make the frivolous arguments, they made the same frivolous arguments throughout the proceedings and continued to advance them at trial, wasting the Tax Court’s and the IRS’s time and other resources. The court warned the Frenches that they would risk a much more severe penalty if they advanced frivolous positions in any future appearance before the court.

Common frivolous arguments

The IRS Office of Chief Counsel has released informal guidance outlining the most common types of frivolous arguments that arise in tax protest cases (“The Truth About Frivolous Tax Arguments” (March 2022)). Following are some of them:

Filing of federal income tax returns is voluntary: Language in form instructions and even some Supreme Court cases (Flora, 362 U.S. 145 (1960)) use the term “voluntary” to describe the U.S. tax system, meaning that taxpayers initially determine the amount of tax and complete returns. This has led taxpayers to frequently make the argument that the filing of income tax returns is voluntary.

Payment of federal income tax is voluntary: As discussed in Rev. Rul. 2007–20, taxpayers often claim that no provision in the Code or any other federal statute requires them to pay or makes them liable for income taxes and therefore the payment of income tax is voluntary.

Certain income types are not taxable income: This argument covers a wide variety of income from specific sources or in specific forms that taxpayers have asserted are not subject to tax. For example,taxpayers have argued that income does not include wages, tips, and other compensation received for personal services (discussed in Rev. Rul. 2007–19 and Notice 2010–33); income derived from sources in the United States (discussed in Rev. Rul. 2004–28, Rev. Rul. 2004–30, and Notice 2010–33); income paid in Federal Reserve notes (Rickman, 638 F.2d 182 (10th Cir. 1980)); and military retirement pay (Wheeler, T.C. Memo. 2010–188).

Internal Revenue Code terms: Taxpayers have made arguments based on the meaning of certain terms in the Code that they are not subject to income tax. For example, taxpayers have interpreted the term “United States” to mean Washington, D.C.; a federal territory; or a federal enclave, and that their income was not subject to federal tax laws because they did not live within the “United States” as so defined (discussed in Rev. Rul. 2006–18).

Constitutional claims: Taxpayers have made multiple arguments invoking constitutional provisions as the basis for not paying income tax. Religious groups have argued that they should not pay income tax on First Amendment freedom–of–religion grounds because their faith does not agree with how the government uses tax money (Lee, 455 U.S. 252 (1982)). Taxpayers, as discussed in Rev. Rul. 2005–19, have repeatedly argued that taxes are a “taking” of property without due process of law in violation of the Fifth Amendment. As also discussed in Rev. Rul. 2005–19, taxpayers frequently argue that the federal income tax is unconstitutional because of defects in the ratification of the 16th Amendment or, as discussed in Notice 2010–33, that the 16th Amendment does not authorize an income tax because it is a nonapportioned, direct tax.

Practitioner insights

Taxpayers should be advised to steer far away from these arguments and any promoters or preparers who repeat them. When complex tax issues arise, there are multiple avenues to seek reputable professional advice and counsel. The IRS and the courts have seen multiple iterations of the above frivolous arguments. Attempting to raise these arguments will result in penalties on top of penalties and interest already accumulating for not filing and paying properly.

Editor

Michael J. Mondelli, J.D., is a director in the Tax Advisory Group, with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mondelli at mmondelli@singerlewak.com.

Contributors are members of or associated with SingerLewak LLP.