Of course, there are many perfectly legal ways to reduce your tax liability. But "frivolous" arguments are not supported by the tax law.
"Too good to be true schemes are exactly that -- too good to be true," explains IRS Chief Counsel Donald L. Korb. "Taxpayers should be careful in making frivolous arguments since courts have routinely rejected them."
In some cases, the arguments sound like they have merit. The IRS notes: "Complicated arguments against the American tax system are built by stringing together unrelated ideas plucked from widely conflicting court rulings, dictionary definitions, government regulations and other sources."
The IRS annually publishes a list of "frivolous" tax positions and arguments. These are claims that have no basis under the law. If someone takes a frivolous tax position on a federal tax return, or refuses to file a return
The entire list of frivolous tax positions and arguments is extremely long and features more than 40 separate entries. Here are 20 examples of positions the IRS and the courts have deemed frivolous and against the law:
1. Compliance with federal tax laws is voluntary or optional and not required by law. Similarly, some argue that employers are not legally obligated to withhold income or employment taxes from employees' wages.
2. The Internal Revenue Code is not law (or "positive law") or its provisions are ineffective or inoperative.
3. A person's income is excluded from taxation when he or she rejects or renounces U.S. citizenship. Sometimes, these people argue they are only citizens of a state.
4. Wages, tips, and other compensation received for the performance of personal services are not taxable income.
5. U.S. citizens and residents are not subject to tax on their wages or other income derived from sources within the United States. Only foreign-source income is taxable.
6. A person can be untaxed, detaxed, removed or redeemed from the federal tax system although the person remains a U.S. citizen. Beware of promoters who sell "untaxing packages" or supposedly teach individuals how to remove themselves from the tax system for a fee.
7. Only certain types of taxpayers are subject to income and employment taxes, (for example, only employees of the federal government).
8. Only certain types of income are taxable (for example, income resulting from the sale of alcohol, tobacco, or firearms)
9. Federal income taxes are unconstitutional or a person has a constitutional right not to comply with the federal tax laws. One such argument states that federal taxes constitute a "taking of property without due process of law, which violates the Fifth Amendment.
10. An individual is not a "person" within the meaning of the Internal Revenue Code and thus, not subject to federal tax laws.
11. Federal Reserve Notes are not taxable income when paid to an individual because they are not gold or silver and may not be redeemed for gold or silver.
12. There is a tax credit or exemption for certain groups (for example, Native Americans or African Americans) as reparations for oppressive treatment or slavery.
13. A Native American or another taxpayer who is not an employer engaged in business can nevertheless claim the Indian Employment Credit.
14. A taxpayer's wages are excluded from Social Security tax if the taxpayer waives the right to receive Social Security benefits. Others argue that individuals can claim a refund of the Social Security taxes paid over their lifetimes.
15. Taxpayers can reduce or eliminate their federal tax liability by altering a tax return (for example, attaching a disclaimer of liability)
16. Inserting the phrase "nunc pro tunc" on a tax return or other document submitted to the IRS has the legal effect of reducing or eliminating the person's tax liability. In a similar argument, some people try filing a tax return that reports no income and has no tax liability (a "zero return") even though they have taxable income.
17. A person can avoid tax on income by attributing the income to a trust.
18. A person can lawfully avoid income tax by sending income offshore, including depositing income into a foreign bank account.
19. A person's income is not taxable if the taxpayer assigns or attributes the income to a religious organization. Others argue that they do not have to pay federal taxes based on their religious or moral beliefs, or because they object to funding certain government programs.
20. The IRS is not an agency of the U.S. government but rather a private-sector corporation or a state or territory agency without the authority to administer the internal revenue laws.
These are just some of the arguments that people have erroneously taken in the past. The IRS explains that other positions that have "no basis for validity in existing law, or which have been deemed frivolous in a published opinion of the United States Tax Court or other court of competent jurisdiction, may be determined to reflect a desire to delay or impede the administration of federal tax laws" and thereby be subject to the $5,000 penalty.
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