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 arguments in the United States Tax Court.

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.

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.

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 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.

employer, I don’t have to withhold in- come 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.

if the taxpayer disagrees with the gov- ernment’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.

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 return with an attachment that dis- claims tax liability.” A return with an attached disclaimer of tax liability is not a valid tax return under the law.

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.

rations tax credit’ to right wrongs done in the past.” No law, including the Internal Revenue Code, permits a “reparations tax credit.”

vices 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 large credit. Taxpayers participating in this scheme, however, ultimately are not

April 4, 2005 829 2005–14 I.R.B.

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.