Why is this Topic Important to Wealth Managers? This blog presents discussion on generally unsound tax positions. Wealth managers who hear clients discussing positions herein or similar arguments should be cautious, warning their clients of the severity in which the Government goes after tax “protesters”, which the government perceives as just another form of tax evasion. Thus, diligent wealth managers should be aware of common myths regarding the tax code.
In the mist of the tax filing season, the Internal Revenue Service last week released the 2011 version of its discussion of many of the more common “frivolous” tax arguments made by individuals and groups that oppose compliance with federal tax laws. 
The Service suggests that “anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read their 84-page document, The Truth About Frivolous Tax Arguments.” Here at AdvisorFYI, we are not contemplating any particular legal grounds for not paying a “fair share of taxes”, whatever that may be, but rather are interested in presenting some of the frivolous positions argued and how the Government generally responds. We’ve presented a few select ones below.
The 2011 IRS document explains many of the common “frivolous” arguments made in recent years and it presents a legal position that attempts to refute these claims. The IRS claims, the document “will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.”
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
Here are some of positions we found to be commonly marketed to the public, and how the IRS responds to the positions:
Contention: The filing of a tax return is voluntary.
Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary. Proponents note the Supreme Court’s opinion in Flora v. United States , which is often quoted for the proposition that “[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint.”
The IRS Response: The word “voluntary,” as used in Flora and in IRS publications, refers to our system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in the Code.
Any taxpayer who has received more than a statutorily determined amount of gross income is obligated to file a return. Failure to file a tax return could subject the non-complying individual to criminal penalties, including fines and imprisonment, as well as civil penalties.
Contention: Only foreign-source income is taxable.
Some maintain that there is no federal statute imposing a tax on income derived from sources within the United States by citizens or residents of the United States.
The IRS Response: The premise for this argument is a misreading of sections 861, et seq., and 911, et seq., as well as the regulations under those sections. For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services.  Further, Treas. Reg. § 1.1-1(b) provides, “[i]n general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States.” These frivolous assertions, the IRS states, are clearly contrary to well-established legal precedent.
And our favorite “frivolous” tax position of 2011 goes to:
Contention: Federal Reserve Notes are not income.
Some assert that Federal Reserve Notes currently used in the United States are not valid currency and cannot be taxed, because Federal Reserve Notes are not gold or silver and may not be exchanged for gold or silver.
The IRS Rebuttal: This argument misinterprets Article I, Section 10 of the United States Constitution. Congress is empowered “[t]o coin Money, regulate the value thereof, and of foreign coin, and fix the Standard of weights and measures.”  Article I, Section 10 of the Constitution prohibits the states from declaring as legal tender anything other than gold or silver, but does not limit Congress’ power to declare the form of legal tender.  In United States v. Rifen,  the court affirmed a conviction for willfully failing to file a return, rejecting the argument that Federal Reserve Notes are not subject to taxation. “Congress has declared federal reserve notes legal tender . . . and federal reserve notes are taxable dollars.”
To determine the tax liability of a transaction, individual, business, trust or estate, please see AdvisorFX Main Libraries, Income Taxes.
Tomorrow’s blogticle will present discussion on planning tips.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
IR-2011-23, March 4, 2011
 The Tax Relief Health Care Act of 2006 amended section 6702 to allow
imposition of a $5,000 penalty for frivolous tax returns and for specified frivolous
submissions other than return
 362 U.S. 145, 176 (1960),
 Citing, I.R.C. § 61.
 Citing, U.S. Const. Art. I, § 8, cl. 5.
 Citing 31 U.S.C. § 5103; 12 U.S.C. § 411.
 577 F.2d 1111 (8th Cir. 1978).