Frivolous Return Fraud

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Please Take Note:
This site is very technical with respect to references to Internal Revenue Code and certain court cases referencing tax protester issues and Internal Revenue Code Section (IRC) 6702-Filing a Frivolous Return. Any comments can be sent to : hancock@frivolousreturnfraud.com via your email provider.

If you have not been a victim of Internal Revenue Service (IRS) abuse by being assessed a penalty under IRC 6702, you may not want to continue with what will be a boring read.

On the other hand, reading on will only provide you with valuable taxpayer information and a plausible explanation for the quandary taxpayers are placed in when the IRS assesses a penalty under Internal Revenue Code (IRC) Section 6702!

If you are still interested, the following issues will be discussed:
• IRC 6702 does not apply to Taxpayers!
• IRC 6702 only applies to Non-taxpayers!
• IRC 6702 only applies to individuals (nontaxpayers) who file a return of tax on behalf of a tax entity (taxpayer) registered as a tax shelter!
• A violation of IRC 6700 and IRC 6701 must be purported on the Return of Tax assessed a filer penalty under IRC 6702!
• The Return of Tax referred to in IRC 6702 can not, by law, be filed by a taxpayer!
• A nontaxpayer is not a person who believes they are not liable for income taxes.
• A nontaxpayer is a person with a duty to file a return of tax for another person(s).
• The filing status of a person, when filing or preparing required IRS documents, determines whether a person is a taxpayer or a nontaxpayer.
• A taxpayer is a person declaring on a return of tax or statement the tax shown on the return of tax is liable and payable by the signer of the document. There are certain IRS forms such as Form 1040, and variations, that, if signed by a person, is a lawful declaration of being a taxpayer notwithstanding arguments to the contrary regardless of form or context.
• A person’s status can be taxpayer when a nontaxpayer files a return of tax declaring income and/or tax liability is transferred to the person named on the return of tax. (e.g. Form W-4 is issued, as a contract, to an employer by an employee to withhold certain amounts of income tax and deductions from income owed the employee/taxpayer). Form W-4 is held by an employer unless IRS demands a copy. The employer is a filer of a return of tax as a nontaxpayer by retaining copies of employee Form W-4’s as required under Internal Revenue Code. Here is the beauty of this scenario. The acceptance of a Form W-4 (not required under Internal Revenue Code but allowed) by the employer creates the employer as a nontaxpayer with respect to this document and the employee as a taxpayer liable for any items shown an a subsequent Form W-2, Form 1099, Schedule K-1, etc.
DISCLAIMER
This site is intended to stimulate discussion on penalty assessments authorized under the Internal Revenue Code (IRC) referenced as Title 26 of the United States Code, in particular, Title 26, Subtitle F, Chapter 68, Subchapter B, Part I, Sections 6700, 6701, 6702, and 6703.

The information expressed on this site has been researched by persons not affiliated with the United States government but is based on legislation of the U.S. Congress and administration of its tax laws by the Executive branch of government. Any information on this site should be thoroughly researched before being relied on by any person.

Send comments to: hancock@frivolousreturnfraud.com.

PREMISES (Presented for Argument Purposes Only)
• All income generated by United States citizens or residents (legal or illegal) from whatever source is taxable.
• Tax liability on income can be reduced by lawful deductions and credits and further reduced by transference of generated income to other persons in the form of expense deductions or contractual agreements where such persons may then be liable for income taxes on such net income less their lawful deductions, credits, and expenses.
• The sections of code included in Title 26, Subtitle F, Chapter 68, Subchapter A apply to taxpayers (Def: persons stating on a return of tax their liability for tax due and promise to pay or claim for a refund of overpayment of tax).
• The sections of code included in Title 26, Subtitle F, Chapter 68, Subchapter B apply to nontaxpayers. This Subchapter contains sections of code pertaining to persons preparing or filing returns of tax, affidavits, tax documents on behalf of another person(s) to include nontaxpayers and taxpayers. This Subchapter also contains penalties for preparers of tax shelter returns, statements, affidavits, claims, etc. listed as Sections 6700 (preparation of overvaluation docs.), 6701 (preparation of understatement docs.), 6702 (filer of tax shelter docs.), and 6703 (rules to determine liability for penalties assessed under IRC Sections 6700, 6701, and 6702).

SYNOPSIS
Internal Revenue Code (IRC) 6702 penalty is assessed on a filer of a return of tax premised on liability of the filer or another person for a violation of IRC 6700 (overstatement of deductions) and IRC 6701(understatement of tax liability).

Liability for a penalty assessed under IRC 6702 depends on whether the filer of a return of tax has knowledge or consented to the desire of a person assessed a penalty under IRC 6700 and IRC 6701 and this desire is purported on the filed return of tax (on behalf of the tax entity). The person assessed a penalty under IRC 6702 could be the same person assessed a penalty under IRC 6700 OR 6701 (but must be an individual who has a duty to act on behalf of the tax shelter entity that must be a partnership or corporation).

HYPOTHESIS’
1. IRC 6700, 6701, 6702, and 6703 do not apply to taxpayers.
2. IRC 6700, 6701, 6702, and 6703 apply only to nontaxpayers (return preparers).
3. IRC 6700, 6701, 6702, and 6703 apply only to persons/ individuals who are nontaxpayers with respect to the return of tax being filed and act in a professional capacity or have a duty to act on behalf of tax entities that are registered as partnerships or corporations under applicable state laws and registered with IRS as tax shelters (IRC 6111).
4. The return of tax, statements, affidavits, claims, and documents referred to in IRC 6700, 6701, AND 6702 are an inclusive or separate return of tax for tax shelter entities.
5. The “person” mentioned in IRC 6700 is the organizer/ promoter required to register the tax shelter entity under IRC 6111. (See: IRC 6707-Penalty for Failure to Register.)
6. The “person” mentioned in IRC 6700 is the organizer/promoter or seller of any interest in the tax shelter entity who is required to keep a list of investors due to a duty to act. (See: IRC 6112, IRC 6708-Penalty for Failure to Keep a List of Investors.)
7. The “person” mentioned in IRC 6700 also makes or furnishes or causes another person to make or furnish a statement knowing it to be false or fraudulent as to any material matter or a gross valuation overstatement (of the value of a deduction) as to any material matter regarding the tax shelter entity (note: there could be more than one person liable for this penalty; courts have also ruled a material matter should be determined by a jury and gross valuation overstatement refers to more than a two to one actual valuation of claimed deductions).
8. The “person” mentioned in IRC 6701 is a tax return preparer, appraiser, or employee or tax shelter entity officer who has a duty to act and who aids, assists in, procures, or advises the preparation or presentation of any portion of a return, affidavit, claim, or other document who knows a portion would result in an understatement of the liability for tax of another person who is a taxpayer/investor/plan participant. (note: there could be more than one person liable for this penalty).
9. The “individual” mentioned in IRC 6702 is a officer/ member of a corporation or an officer/ member of a partnership or an officer/ employee of the tax entity who has a duty to act with respect to the filing of a return of tax on behalf of the tax shelter entity or can also be the person/ individual registered as the tax shelter promoter/organizer . (Note: there is only one individual/person liable for this penalty for any particular frivolous return of tax but there may be more than one person liable for a penalty under IRC 6701.)
10. A tax shelter is designed to avoid or evade income tax and, as a tax entity, is a nontaxpayer when filing returns of tax declaring deductions and income for other persons. However, a tax shelter entity remains a taxpayer when filing returns of tax declaring deductions and income (if any) for itself.
11. A tax shelter is merely a tax entity disclosing the names of investors (IRC 6112) who may be liable for taxes or be eligible for income deductions or tax/income credits as a result of being an investor in the tax shelter. If the investor in a tax shelter is unable to defer to other taxpayers or deduct allocated individual income as an income deduction or credit from the tax shelter (not likely given the purpose of a tax shelter) then the income could be taxable on the investor’s (taxpayer) individual income tax return, partnership income tax return, or corporate income tax return.
12. IRC 6702 penalty assessment for an individual who files a return of tax is dependent on whether a person is liable for a penalty under IRC 6700 and IRC 6701. The person liable for a penalty under IRC 6700 and IRC 6701 may be the individual who files a return of tax for the tax shelter entity and would also be liable for a penalty under IRC 6702.
13. IRC 6703 waives the “notice of deficiency” requirement because “deficiency’ is a term applicable to taxpayers who may owe tax not paid and not to nontaxpayers who merely declare income or deductions of other persons on IRS forms.
14. IRC 6703 allows a bond of 15% to be paid for penalties assessed under IRC 6700 or IRC 6701. There is no allowance for a bond to be posted for an assessed penalty under IRC 6702 because IRC 6702 is not assessable on an individual without a person also being assessed a penalty under IRC 6700 or IRC 6701. A bond for IRC 6702 would be redundant to an allowed bond for IRC 6700 or IRC 6701.
15. Notice and Demand is not required for IRC 6702 as it is for IRC 6700 or IRC 6701 because the individual assessed a penalty under IRC 6702 is probably the same person assessed a penalty under IRC 6700 or IRC 6702. If not the same person, then liability for a penalty assessed under IRC 6702 would depend on whether the individual who files the return of tax on behalf of the tax shelter entity had knowledge or consented to the desire of the person liable for a penalty under IRC 6700 and IRC 6701 as purported on the filed return. So, the assessment of penalty under IRC 6702 is not lawful without an accompanying penalty on a person(s) under IRC 6700 or 6701.

NULL-HYPOTHESIS
1. IRC 6700 > 6703 apply to any person/individual who files a return of tax.

DISCUSSION OBJECTIVE:
Establish intrinsic connection between assessable penalties as described in Internal Revenue Code (IRC) 6700, 6701, 6702, and 6703 for persons who are abusive tax shelter organizers/ promoters, return, affidavit, claim, or other document preparers, and individuals who are return of tax filers with a duty to act on behalf of a tax entity registered as a tax shelter and rules to apply these penalties as expressed in IRC 6703.

DISCUSSION INTRODUCTION:
IRC Sections 6700, 6701, 6702, and 6703 of the Internal Revenue Code are assessable penalties on any person who is a tax shelter organizer/promoter (6700), any person who is a preparer of a tax shelter return , affidavit, claim, or other document (6701), any individual who has a duty to file a tax shelter return of tax (6702), and rules for any person/individual and the IRS to address the issue of liability for such penalties in a proceeding in Federal District Court with burden of proof of a person’s/individual’s liability for such penalties on the Internal Revenue Service (IRS).

Before and since 1982, a number of sections were added and subsequently amended to the IRC which provide further support for the connection between 6700 through 6703 as assessable penalties on tax shelter officers or employees, advisors, and preparers and not meant for any other person/individual not connected to the organization of a tax shelter, preparation of tax documents for the tax shelter, and the duty to file a return of tax for the tax shelter under review. Sections of IRC to review are: IRC 6111, 6112, 6662, 6694, 6695, 6696, 6700, 6701, 6702, 6703, 6707, 6708.

There is a question of whether the IRS can declare any person a tax shelter without the provision for establishing a tax shelter in state law. Some states may not have any provisions for a tax entity organizing itself as a tax shelter. This discussion does not address this situation. However, this discussion does address how IRS determines whether an entity is a tax shelter or not. Bear in mind, tax entities are formed under state law.

But, let us address the key IRC section: 6702 - Frivolous Income Tax Return. IRC 6702 is not a stand alone penalty to be applied at the whim of any IRS computer puncher who woke up on the wrong side of the bed or who relishes in the power conferred by position or abusive IRS policies meant to “collect any tax by any means.” IRC 6702 is meant to penalize an individual who files a return of tax for a tax entity registered tax shelter knowing what is purported on the return of tax is not accurate which respect to a material matter.

If the Congress intended 6702 to stand alone and be assessable on any return of tax the IRS deems a frivolous return then would not this situation open wide the door of potential taxpayer abuse? Of course it would! And, is not the IRS doing exactly what the Congress did not intend? That is, redefining IRC to whimsically punish outspoken taxpayers when in fact there is no section of the IRC authorizing the IRS to punish taxpayers except within the scope of the Internal Revenue Code. There are no provisions in the IRC for the assessment, by the IRS, of a “frivolous return” penalty for a taxpayer. There is, however, a section of code that authorizes the courts to assess penalties for a frivolous or groundless taxpayer and attorney arguments in court.

It is an infringement on freedom of speech for the IRS to suppress non threatening taxpayer statements by intentionally assessing a penalty that is not within the intent of statutory law passed by the Congress and signed by the President of the United States. It seems the intent of United States law does not apply to the Internal Revenue Service. Here lies another discussion, for the future, of why the United States Congress,in particular, the Senate Finance Committee, the House Ways and Means Committee, and the Joint Finance Committee, allows the IRS to run amuck levying erroneous penalties and practice nefarious collection schemes using unlawfully assessed penalties and denial of due process against taxpayers. The Frivolous Fraud Return scheme may be one of many schemes the IRS uses to implement its policy to “collect by any means” and like any other scheme is apparently business-as-usual to Presidential Appointees and Federal officers of the Treasury Department.

RETURN OF TAX-ORGANIZER, PREPARER, AND FILER PENALTIES
In order to understand how 6702 fits into a tax shelter situation, it is necessary to discuss 6703, the Rules applicable for assessed penalties under 6700, 6701, and 6702.

Section 6703 leads off by stating the issue of whether or not any person/individual is liable for a penalty under 6700, 6701, or 6702, the burden of proof shall be on the IRS. The next subsection states “Deficiency procedures shall not apply.” Deficiency procedures are applicable to taxpayers only. It must be noted at this time there appear to be to fundamental categories of persons/individuals who file returns of tax. There are taxpayers and nontaxpayers. The term nontaxpayer is used in this discussion to differentiate between a person/individual who files a return of tax on behalf of a tax entity to declare its tax liability and a person/individual who files an income tax return to declare their personal tax liability and are, therefore, subject to internal revenue tax, i.e. “taxpayer.”

A taxpayer is any person subject to any Internal Revenue tax. How does a person become subject to Internal Revenue tax.

Well, it is fairly simple to become a taxpayer. All a person has to do is sign a return of tax that states a person or in the case of a joint return, married persons, is liable for tax due based on information the taxpayer provides or the IRS has access to through information returns (of tax) filed by others (nontaxpayers with respect to the taxpayer’s return of tax) such as W-2 forms, 1099 forms, partnership, and corporation returns, and other information returns, statements, affidavits, claim for deductions or other documents. So, if a taxpayer is a person who is subject to any Internal Revenue tax then how does one become a nontaxpayer?

To answer the question of how does one become a nontaxpayer, it is imperative to look at the Sixteenth Amendment of the Constitution. It states in part, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived . . .” Without arguing the validity of the Sixteenth Amendment, for purposes of this discussion, the Congress can make law to lay and collect taxes on incomes. The Congress did and does just that.

Now, if it is assumed all income is generated by businesses and a business is allowed to deduct business expenses and claim business credits allowed under revenue law then any purchases of materials, labor costs, facility rents/ leases, or any other business expense is a deduction from generated income leaving a net profit for tax purposes.

Here is the gist of this situation. All business income, even as deductions, remain income for tax purposes. So, when a business purchases materials with income then the supplier of those materials is now liable for income tax on that income less any business expenses of the supplier. In other words, a business passes on tax liability through business expenses and business deductions to include wages, salaries, tips, interest, dividends, etc.

To expand this idea, an employee then is the recipient of taxable income that has been deducted by the employer as a business expense or as income generated as a result of the existence of the business and legally fobs all income tax liability for wages, salaries, tips, etc. to employees, the cost of goods to suppliers, and other expenses to other suppliers of services.

Employees are not the only possible taxpayers. An entity can be organized to be a “person” who will be subject to any Internal Revenue tax the entity would be liable for. An entity could be a partnership, corporation, association, estate, real estate investment company, Limited Liability Company, Limited Liability Partnership, etc. and the entity would then be the person subject to internal revenue taxes and is therefore a taxpayer.

A sole proprietorship is not an entity organized for tax purposes because all the assets and income are owned by a person who is the individual liable for all taxes due. So, a sole proprietorship is a taxpayer with respect to its income tax return but still can pass on tax liability for business income to its suppliers, vendors, employees, etc. and is therefore a nontaxpayer with respect to filing forms for other persons such as Form W-2 and Form 1099. It follows, a sole proprietorship cannot be a tax shelter where it is assumed the main purpose of a sole proprietorship is to attempt to generate business income and not intentionally generate a business loss.

Further, a tax shelter is required to register the purpose of its entity with the IRS to intentionally evade or avoid income tax. A sole proprietorship, without employees, is not required to register its purpose with the IRS because of the assumption of intent to be profitable and not to intentionally evade or avoid income tax. A sole proprietorship would, however, be required to register with the IRS if the sole proprietorship will have employees or independent contractors doing work for the business to be able to pass on taxable income (profit) as wages or salaries to employees or independent contractors who would then be potential taxpayers for their wages or salaries.

Therefore, with respect to the applicability of IRC 6702, a sole proprietorship would not qualify for a frivolous penalty assessment for filing a return of tax declaring income or for any other IRS requirement.

However, a tax entity can sell an interest in itself and is commonly done in the form of partnerships and corporate shares known as “stocks.” Here, the partnership is a nontaxpayer when advising, preparing, or filing forms, documents, etc. on behalf of a taxpayer (partner(s) or stockholder). Of course, the tax entity must file an income tax return for itself as a taxpayer claiming deductions from income passed to other taxpayers identified in its return of tax.

Taxing authority (Congress) has delegated administration of tax laws (Title 26) to the Secretary of the Treasury and the Secretary has delegated collection administration to the Internal Revenue Service also referred to as the “Secretary” in Internal Revenue Code.

***************
United States Code (USC), Title 26, IRC 6700, 6701, 6702, and 6703 find their authority in House of Representatives Bill HR-4961 that added Public Law 97-248 and relevant Statutes on September 3, 1982.

The prevalent appeals case to attempt to address the issue of whether IRC 6702 is assessable on a taxpayer is the Miller case in 1984. Here we find the source of IRS skullduggery or incompetence. It’s not clear which technique the IRS utilized to accomplish the most flagrant and nefarious taxpayer abuse scheme to quash free speech appearing on the record. Of course, all done with the complete and willing assistance of the federal courts then and continuing to the present some twenty-three years at recent count.

Copyright: Tengoku dojo, 2006
NOTICE: Tengoku dojo is not affiliated with Freedom School.
NOTICE: If anything in this presentation is found to be in error a good faith effort will be made to correct it in timely fashion upon notification.
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