Paul L. Caron

Wednesday, April 19, 2006

Cords on Tax Protestors and Penalties

Cords_1 Danshera Cords (Capital) has published Tax Protestors and Penalties: Ensuring Perceived Fairness and Mitigating Systemic Costs, 2005 BYU L. Rev. 1515.  Here is the Conclusion:

Voluntary compliance is essential to the efficient and effective collection of revenue by any government. Allowing certain members of the society to avoid their obligation to contribute to the government, simply because they engage in dilatory tactics, is not an acceptable option. If some succeed, and their success is known, others may be encouraged to engage in the same behavior. Moreover, it is unfair that the majority bear the costs to the system resulting from tax protestors' use of frivolous positions.

Tax protestors cannot be shut out of the system entirely because others might then fear that they too would be excluded. Tax protestors will, on occasion, raise valid complaints. Shutting protestors out of the tax dispute systems would diminish the perception of fairness of the system. Because fairness of the system is an essential component to voluntary tax compliance, it should be encouraged, even at a cost. On the other hand, it is unfair to impose the costs of frivolous positions on those who comply.

The current penalty provisions do not adequately deter tax protestor behavior and tax protestors cannot be shut out of either the administrative or judicial system; therefore, additional penalties must be imposed. Tax protestors impose costs at the administrative level when they demand that the IRS and its employees prove to them that income taxes are constitutional, legally enforceable obligations. These costs are exacerbated when the tax protestor seeks review of the liability, either before payment by petitioning the Tax Court, or after payment, which may have occurred through seizure or mandatory withholding, in the district courts. Judicial review expends administrative resources defending the Service's determinations and collection actions and judicial resources in addressing motions and trying cases. The costs that may be incurred in pursuing collection and defending tax deficiency determinations and collection decisions have been increased with the adoption of CDP rights. Imposing nondiscretionary penalties on frivolous arguments will protect the system from both the concerns that some will be shut out of the system and that others will have to bear the cost of the frivolous arguments. The amount of the penalty should be the amount of the costs incurred by the Service and the courts to collect the taxes, interest and other penalties owed.

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