TIGTA: Frivolous Tax Arguments Cost $27.2 Million to IRS in 2014

Chris Gaetano
Published Date:
Oct 14, 2016

The Treasury Inspector General for Tax Administration has faulted the IRS for not doing enough to stop people from using frivolous tax arguments, saying that the service has paid more than $27.2 million in potentially erroneous refunds or credits based on at least one frivolous tax argument in 2014.

Frivolous tax arguments are reasons for lack of compliance with federal tax statutes that the IRS does not view as valid, such as the income tax is not constitutional based on the fourth, fifth, 13th or 16th amendments, that fiat money does not count as income, that only federal employees are subject to federal income tax, or that the IRS is not an agency of the United States. Taxpayers making claims such as this are subject to a $5,000 fine in addition to whatever other fees and penalties for noncompliance their claim produces. 

The IRS relies on a combination of manual review and automated filters to detect returns using these arguments. However TIGTA said that, in 2014 at least, these review and filtering processes failed to detect 262,121 potentially frivolous tax returns, despite these tax returns having the characteristics filters are intended to identify. Of these returns, TIGTA said the IRS paid out $27.2 million in credits and refunds to 1,938 of these taxpayers. 

It could be due to lack of staff training. TIGTA noted that while the IRS does provide staff training on frivolous tax arguments, those working in the units most likley to encounter frivolous tax arguments are not required to take this training. 

"According to the IRS, these two online training courses had been taken only 726 times between November 2011 and September 2015. By comparison, the IRS plans to bring on more than 19,000 returning or new seasonal employees for the 2016 Filing Season whose responsibilities will include opening mail, sorting tax returns, inputting paper tax returns into the IRS’s computer system s, and working tax returns with IRS identified errors. All of these tasks provide an opportunity for employees to identify frivolous tax returns and/or correspondence," said TIGTA. 

The IRS, in response to the TIGTA report, noted that it has prevented the payment of $3.6 billion worth of fraudulent refund claims and has assessed over $233 million worth of fines for frivolous arguments. While it agreed with TIGTA that there needs to be additional filters to identify frivolous claims, it noted that filing patterns consistent with frivolous claims are not always consistent with actual frivolous claims. Further, just because a filter might indicate a return has a low risk of being frivolous does not mean that the return is completely guaranteed it won't be frivolous. 

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