Tax Court Approves Penalty But Does Not Allow IRS To Pile On


Just because somebody believes things that I find preposterous and even harmful, doesn’t stop me from liking them.  That’s the situation with me and Peter Hendrickson, author of Cracking The Code.  The view that I find both preposterous and harmful is that the Internal Revenue Code is very narrow in its application and that the IRS tricks people into paying taxes that the “CtC educated” know how to avoid.  That is why the first thing that popped into my mind when I read Judge Gustafson’s decision in the case of Gwendolyn Kestin was to check in with Mr. Hendrickson.

The Case

Ms. Kestin filed her 2014 return correctly, in the view of IRS and the Tax Court, reporting wages of $155,702.  Then in September 2015, she and her husband filed an amended return zeroing out the wages.  Part III of Form 1040X requires the filer to explain the changes.  On their form, they referred to attached letters.  Ms. Kestin’s letter included

“I am a private sector citizen (non-federal employee [sic] and employed by a private sector company (non-federal entity) as defined in 3401 (c) (d). I am not employed in a ‘trade’ or ‘business’ nor am I an ‘officer of a corporation,’ nor do I hold a public office. Therefore I did not receive privileged, taxable ‘wages’.

The IRS, the Tax Court and you and I all know that that is a frivolous argument. The IRS sent Ms. Kestin letter 3176C which is a warning that the position is frivolous and can be subject to a $5,000 penalty.

The Kestins responded with a letter defending their position which included a reference copy of the original 1040X, which was stamped by the IRS as a copy not to be processed.

Penalties Multiply

The initial penalty notice for $5,000 was prepared but then a handwritten note was added to double it counting the 1040X copy attached to the letter as an additional frivolous return.  Meanwhile, the Kestins were sending letters, with attachments, asking why their refund was being held up. There were five of them, which led to an additional penalty assessment of $25,000….Read more>>