Is the IRS Time-Barred From Imposing a Penalty on a Frivolous Amended Return?

The IRS is allowed to impose a penalty on the filing of a frivolous tax return (Internal Revenue Code Section 6702(a)). Today, the Tax Court looked at a taxpayer who filed a normal tax return, but then filed an amended return where she claimed she wasn’t a “person.”

Well, we’re all people (I hope), and the petitioner, one Marla Crites, also said that wages aren’t taxable (helpful hint: they are taxable). When the IRS imposed a $5,000 penalty on the frivolous amended return, she asked for a Collection Due Process Hearing. Ms. Crites filed four amended returns (not one), and they all appear to have said that she wasn’t liable for tax. At the CDP, the Appeals officer upheld the IRS. She then went to Tax Court.

I’m not going to go over the arguments that wages aren’t taxable, or that she’s not a person; neither argument is worth any time. Nor is her argument that an amended return isn’t a return under IRC Section 6702; the Tax Court (and other courts) have held that it is.

The interesting issue is whether the statute of limitations time bars the IRS from imposing a frivolous return penalty on an amended return that the IRS does not process. The Tax Court notes,

As the Commissioner observes, penalties under section 6702 do not have a readily observable statute of limitations. The section penalizes not just frivolous “returns”–and even here Congress was careful to penalize not just returns but “what purports to be a return”–but frivolous “submissions”. It would be odd if penalties keyed to “submissions” had somehow to be tied to the limitations period for tax that is supposed to be shown on a “return”…

But let us assume–and here we are expressly assuming without deciding–that Crites is right that the filing date of her “return” is the key date. She had two returns, and the one that the Commissioner wants to punish her for is the amended return that she sent the IRS in October 2008. He assessed the penalty in July 2009, well within three years of her submitting it.

The IRS then asked the Court to impose a penalty for filing a frivolous case at the Tax Court. I hope Ms. Crites looks carefully at the last line of the decision:

…[T]his is Crites’s first trip to Tax Court, and by submitting the case under Rule 122, she did save us the burden of trial. And one of her arguments, the statute-of-limitations issue as applied to frivolous amended returns, was one we had not yet addressed and was not itself obviously frivolous. We will therefore exercise our discretion not to sanction her under section 6673.

This time.

Case: Crites v. Commissioner, T.C. Memo 2012-267

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