Tax Court In Brief | Walker v. Commissioner | Frivolous Return Penalties And Collection Due Process

The Tax Court in Brief – June 13th – June 17th, 2022

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of June 13th, 2022, through June 17th, 2022

• Phillips v. Comm'r, T.C. Memo. 2022-58 | June 13, 2022 | Lauber, J. | Dkt. No. 18553-21L
• Hatfield v. Comm'r, T.C. Memo. 2022-59 | June 13, 2022 | Lauber, J. | Dkt. Nos. 7327-20, 1500-21
• Romana v. Commissioner, T.C. Summary Opinion 2022-9 | June 16, 2022 | Carluzzo, J.| Dkt. No. 1156-21S
• Howland v. Commissioner, T.C. Memo. 2022-60 | June 13, 2022 | Weiler, J.| Dkt. No. 17526-19
• Chavis v. Comm'r, 158 T.C. No. 8 | June 15, 2022 | Lauber, J. | Dkt. No. 11835-20L
• Kellett v. Comm'r, T.C. Memo 2022-62 | June 14, 2022 | Greaves, J. | Dkt. No. 21518-18

Walker v Commissioner, T.C. Memo. 2022-63 | June 15, 2022 |Nega, J.| Dkt. No. 16958-18L

Opinion

Short Summary: This case involves the dispute liability for frivolous return penalties. Chule Rain Walker (Walker) and his spouse jointly filed their Federal tax return in 2016, reporting zero in wages, in contrast to a higher amount reported by their respective employers in such year. Walker requested for a refund to the IRS, as he considered wages are not taxable income, because he and his wife worked in private sector. The IRS after several warnings, determined two return penalties due to their frivolous positions under section 6702 (frivolous tax submissions), (1) regarding the original tax return, and (2) concerning the return copy attached by Walker where he disputed IRS position. The IRS sent a notice of intent to levy and rights to a hearing regarding such penalties. Walker requested a collection due process (CDP) hearing. However, he did not provide the requested documentation to challenge IRS position and did not seek for collection alternatives. A notice of determination concerning collection action was issued regarding the unpaid penalties. Walker petitioned to the Tax Court, claiming IRS erred in sustaining the two penalties. The Tax Court determined Walker failed to challenge his liability in the CDP hearing, sustaining the first penalty. Additionally, it concluded a copy of the original tax return shall not be considered as purported return requesting for a refund. Thus, the Tax Court determined it was an abuse of the discretion and an error to sustain the second penalty.

Key Issues:

• Whether, pursuant to Section 6702, the IRS erred in sustaining two frivolous penalties against Walker, one against the original tax return and the second against its reference copy?

Primary Holdings:

• Walker failed to provide the information requested in the CPD process to challenge the IRS position. Additionally, he did not provide enough arguments to support his wages income was not taxable income, as he only argued he is a "non-Federal worker".
• A copy of the original tax return ("plained marked photocopies") where the taxpayers do not request a refund are not purported returns under section 6702(a), and an assessment of a penalty is an error.

Key Points of Law:

• Taxpayers are entitled to challenge frivolous penalty at the CDP proceeding. However, taxpayers fail to content it when only frivolous arguments are made in the CDP Proceeding. In such a case, the Tax Court de novo reviews for abuse of discretion.
• Section 26 U.S.C. §6321 provides that, a person is liable to pay any neglects or refuses to pay after request, consequently over the amount shall be a lien in favor of the U.S. upon all property and the right the person owns.
• A notice shall be sent to the taxpayer to have the right to an administrative hearing on the matter. See 26 U.S.C. §6330(c)
• IRS bears the burden of proof and of production to support taxpayer's liability under Section 6702(a).
• Taxpayer should provide all the information and documentation requested by the Appeals office to support this position. See Reg. § 301.6320-1(e)(1)
• Appeal officer at the haring shall (1) obtain verification from the Secretary that the requirements of any provisions were met, (2) consider taxpayer arguments, and (3) "whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary". See 26 U.S.C. §6330(c)
• A person shall pay a penalty of $5,000 if the taxpayer files that purports to be a tax return which contains information that indicated the self-assessment is substantially incorrect. See 26 U.S.C. §6702(a)(1)(b).
• In Kestin v. Commissioner, 153 T.C. 14, 26–28 (2019), the Tax Court held "plainly marked photocopies" of an original return that did not themselves request a refund were not purported returns under section 6702(a)". See Smith, T.C. Memo. 2021-29, at *29 and Jaxtheimer, T.C. Memo. 2019-164, at *16.

Insights: This case is another example of a taxpayer failing to challenge a frivolous penalty, but successfully challenging the other penalty due to an abuse of determination of the Appeal office. The argument establishing only that a non-Federal worker is not subject to wages tax is not enough to evidence his non-compliance. We recommend seeking proper tax advisory, before continuing challenging IRS in frivolous penalties. For additional information on 26 U.S.C. §6702 (frivolous penalties), see Freeman Law:

Addis v. Comm'r, T.C. Memo. 2022-24 | March 28, 2022?|Urda, J. | Dkt. No. 12140-20L

Golditch v. Comm'r, T.C. Memo. 2022-26 | March 29, 2022?|Lauber, J. | Dkt. No. 7726-20L

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