Working Hard to Get Penalized

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The case of Whitaker v. Commissioner, T.C. Memo. 2017-192 provides another example of a taxpayer who works hard to make sure that the IRS penalizes him. In the process, he drains resources at the IRS and the Tax Court. I have no great sympathy for the behavior, but it is a generally sad process to watch. In this case, it is especially sad because it appears that if the Whitakers had filed a proper return claiming the retirement distribution, they would have received back all of the withholding. They do not appear to have enough income to be taxed since their standard deduction and personal exemptions exceeded the amount of the pension. Unless there was other taxable income not reflected in the report of the case, they traded a $3,600 refund for a $10,000 penalty.

The opinion involves the imposition of the frivolous tax return penalty of IRC 6702(a). This is one of over 50 assessable penalties found in Chapter 68, Subchapter B of the Internal Revenue Code. Section 6702 entered the Code in 1982. Taxpayers making frivolous tax returns or frivolous submissions get hit with a $5,000 penalty. I have written about this penalty before here, here, here and here. What interests me about this case, and what has interested me before because it is hard to tell, is why Mr. Whitaker was permitted to litigate the merits of his 6702 penalty in a Collection Due Process (CDP) case. I believe taxpayers should have the right to litigate the merits of assessable penalties in CDP cases because they do not have the right to a prepayment forum; however, the IRS generally objects and the Tax Court sustains the objection based on the IRS regulations. I will discuss the issue further below, but I cannot tell why the IRS did not object to the litigation in this case. As an outside observer without all of the information driving the decision not to object, it is unclear to me why the IRS objects in some cases and not in others.

Additionally, the IRS can reject frivolous arguments in CDP cases; however, it can only reject cases based on frivolous submissions and not frivolous returns. Because Mr. Whitaker’s case involves a frivolous return described in 6702(a) rather than a frivolous submission described in 6702(b), the bar to making an argument in a CDP case does not preclude him from making his type of frivolous argument in this CDP case.


The Court lays out the three bases for the 6702 penalty: 1) “the taxpayer must have filed a document that ‘purports to be a return of a tax imposed by’ title 26;” 2) “the purported return must be a document that either ‘does not contain information on which the substantial correctness of the self-assessment may be judged’ or ‘contains information that on its face indicates that the self-assessment is substantially incorrect:’” and 3) “the taxpayer’s conduct must either be ‘based on a position which the Secretary has identified as frivolous’ or must ‘reflect a desire to delay or impede the administration of Federal tax laws.’”

The Court explains why Mr. Whitaker’s, and the actions of his deceased wife, meet the criteria of the statute. Basically, they kept submitting documents purporting to be returns that showed zero income and zero tax, but withholding which they wanted to use as a basis for obtaining a refund (a refund it looks like they were entitled to, had they properly listed their income.) The IRS conceded the penalty for one of the returns during the Tax Court case which may have influenced the Tax Court not to impose the 6673 penalty, which it had done in a prior case involving frivolous submission penalty, but the imposition of the penalty itself breaks no new ground. The Tax Court may have been influenced not to impose a 6673 penalty because of the apparent lack of a tax liability on the return had it been correctly filed and the sadness of the case.

We have written extensively on the efforts to litigate the merits of a tax liability before the Tax Court of individuals faced with large assessable penalties who have no easy, and sometimes no realistic, way to pay the penalty and bring a refund suit. The Whitaker case contains no explanation of why the taxpayer did or did not have an opportunity to bring the merits of the assessed penalty to Appeals at the time of the assessment and why that opportunity did not foreclose the opportunity to raise the merits of the penalty at the CDP stage of the case. Did the IRS fail to offer an Appeals hearing at the time it imposed this penalty? Did the IRS simply fail to object to raising the merits during the CDP process and allow a tax protestor to go forward with the merits litigation in Tax Court, tying up the resources of the Court and three Chief Counsel attorneys on what seems like a fairly wasteful case (though the concession of one of the three penalties suggests the existence of a partially meritorious suit)? Does the fact that the IRS allowed Mr. Whitaker to bring a merits case on his assessable penalty mean that other taxpayers should at least try to bring merits litigation in the CDP context hoping that they will be allowed to do so? I would like to know why the merits litigation was allowed here, and in other cases I occasionally see where I would have expected the taxpayer to have the opportunity to go to Appeals at the time of the imposition of an assessable penalty, when most taxpayers get turned away. The answer may lie in a simple failure to offer a conference with Appeals at the time of assessment, but it is unclear.

As mentioned above, another interesting feature of this case is that the IRS could have turned this case away from CDP consideration under the provision of IRC 6330((c)(4)(B) if his frivolous position were a “submission” rather than a “return.” This section precludes the taxpayer from raising an issue at a CDP hearing if the issue meets the requirement of clause (i) or (ii) of section 6702(b)(2)(A). The bar to raising frivolous positions in CDP cases is intended to keep persons from using the CDP process to promote such positions. This case shows how the CDP process can still be used to promote a frivolous position as long as the taxpayer takes the position on a tax return, as Mr. Whitaker did, rather than on another type of document such as a CDP request. The case also points out the terrible result that can happen when tax protestor arguments are pursued.


  1. I guess, saying their piece and having their day in court was worth $10,000.00 to them.

  2. Norman Diamond says:

    It is entirely possible to have negative income (capital losses), zero tax, and substantial withholding (30% of gross proceeds of the sale from which the capital losses derived).

    IRB 2010-33 added an item to the list of frivolous positions, designating as “obviously false” and therefore frivolous, the tax return’s declaration of the actual amount of withholding. This prevents the IRS from auditing and prevents courts from taking jurisdiction on the actual amount of withholding. As far as I can tell, the purpose is to protect embezzlers other than the ones who have been caught.

  3. Norman Diamond says:

    To clarify, my wording “capital losses” means actual capital losses, deriving from the sale not from the withholding.

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