Knowledge is Power Part Three

May 31, 2022

I wrote a blog a few weeks back about the difference between knowledge and power.  Last week I wrote about the IRS’s immense power in a collection matter.  I gave an example of what happens in real life about what can happen if you owe money to the IRS. In the example I also explained the IRS’s power to file tax returns for you, even if you aren’t aware that they are doing it.  What started this series was a clip (maybe TikTok or Facebook reel) where a man whispered, “knowledge is power”.  To his shock the woman he was speaking to said to seize him and cut his throat.  But she casually relented when the knife reached the neck and told her bodyguards to stop, take three steps back, turn around and then close their eyes.  They obediently complied.  Then she went to the shocked man who had said knowledge is power and whispered, “Power is Power”.  Doing what I do for a living I immediately thought of the IRS and how they have unbridled power.  We have knowledge, and I’d highly recommend you have all the knowledge you can muster if you are going to tackle the IRS.  But for the record, while knowledge is helpful, and you better have as much as you can on your side, the IRS has the power.  You can ask.  You can persuade.  You can even get angry or cry, but the IRS has power.  They can say no to pretty much anything you ask. 

I promised in the blog to blow your mind learning how much power the IRS has if you file a tax protester type return.  They call these “frivolous returns”.  The IRS no longer refers to them as tax protesters, as they have for decades in the past.  But the gist of it is that someone files a return showing no income, while stating various arguments that the tax system is illegal or voluntary, or their income isn’t really income per the code somehow or another.  I used to see this all the time, but I don’t see it as much anymore.  Mostly because most of the tax protest promoters are in jail.  Even the infamous judge Risso who encouraged thousands of people to file returns like this.  As a complete rabbit trail, do you know what his defense was once the criminal justice system got ahold of him?  Insanity.  That’s right, the guy who duped all these people into filing these returns as a perfectly legal way to go about taxes, when his butt was on the line, he decided he must have been crazy to do it.  It didn’t work, he went to jail.  Interestingly, his wife did too.  She must have been complicit in the situation.   

But back to the Power of the IRS in this type of situation.  When returns are filed like this, if you are lucky this is what will happen.  I’ve seen it end to end with my own eyes.  First the IRS will charge $500 per person (total of $1,000 for a joint return) for EACH year this is done.  Most cases I’ve seen the IRS pick up 3 to 6 years of tax returns.  That alone is real money.  But when the IRS denies a return, like this you have appeal rights.  Most people who have taken this position file an appeal.  Of course, this appeal goes to another IRS agent.  That agent doesn’t believe the tax system is voluntary.  So, instead of hearing your case, he/she writes a response that states your appeal is frivolous, and therefore he is refusing to hear the case or hold a meeting.  And then assesses a penalty of $5,000 per appeal.  So, the penalties are adding up!

But this appeal comes with tax court oversight, so any good tax protested worth their weight will file a tax court petition.  Thank god we live in America!  That’s one of the benefits of living in this amazing place.  We have a system that has checks and balances and by jove, we will get our day in court!  We are trained to believe in Jury by a Trial of your peers. But wait a minute here, and this is what I meant by this will blow your mind.  First of all, Tax Court, where these things are “heard” is an administrative court.  There is no jury.  The ultimate decision is unsettlingly by one person.  The Judge.  He has ultimate power in the matter, and whatever he says is undisputed truth and final.  Don’t forget he is a Tax Court Judge.  Not exactly a great place to pose arguments that the system is illegal.  It gets worse.  While the person is waiting for their “day in court” the IRS is writing the judge asking for a “summary judgement”.  Summary judgement means that there are no questions of fact, the judge has everything they need to rule without a trial.  The IRS poses the argument that it’s well established that people have to pay taxes, and this line of thought has been adjudicated multiple times, and this is just a waste of the courts time, so rule NOW, judge, without the benefit of a trial.  After this the person, waiting for their day in court gets a letter that they lost, and the judge has ruled against them.  It’s over and FINAL.  This is the end of the law.  And by the way, the Court issues a $25,000 per person, per year, penalty for filing a frivolous tax court petition. 

The most recent case I was involved with (picking up the pieces at the end) they had filed for 6 years as joint returns.  That’s $25,000 per person, per year.  On this joint return that amounted to $300,000 plus the appeal penalties, plus the frivolous return penalties, plus penalties and interest on all of it.  To add injury to insult, when the IRS rejects your returns originally filed as a tax protester, the IRS also files returns FOR YOU that reflect the absolute most that they feel you could possibly owe.  Now you are stuck with those super inflated balances as well, plus late filing penalties, late payment penalties, and interest on all of it.  The above situation culminated in a tax balance with all the penalties, interest, and overinflated taxes the IRS filed of well over $400,000!  They made less than $50,000 per year.  Pretty horrible tax liability for such a small income.  All of this is legal, and the IRS is literally above the law.  No one saw their day in court.  That’s Power!

If you noticed, I put at the beginning of what happens if you file these kinds of returns, if you are lucky the above-mentioned paragraphs are true.  If you aren’t lucky, all of the above will happen, AND they will file criminal charges against you.  And you can go to jail.  I have worked on cases like this where people have gone to jail.  I have similar cases where people were offered mercy if they cooperated, and they didn’t go to jail.  But they owed lots and lots of money to the IRS.  The power to put people in jail is power indeed.

I think sometime soon I will write about the IRS’s power in an audit.  Again, you will see that the power of the law is jaded in favor of the IRS.  There is little doubt that the IRS has the power.