Republican Presidential nominee Donald Trump may have used a $916 million business loss in 1995 to legally avoid paying federal income taxes for up to 18 years, but the real estate billionaire did use a legitimate loophole in the tax code to avoid having to pay.
A recent report by the Treasury Department’s Inspector General for Tax found that tens of thousands of other individuals or businesses have used “frivolous tax arguments” or illegal claims to line their pockets and avoid paying taxes.
Indeed, a review of tax filings between fiscal 2012 and 2014 turned up 36,648 “frivolous” tax returns that slipped past IRS scrutiny in which taxpayers resorted to one or more of 50 different spurious arguments to dodge their tax obligations. As a result, the IRS paid more than $27.2 million in potentially erroneous refunds or tax credits to 1,938 taxpayers in fiscal 2014 alone.
However, the report suggests that the IRS has been falling down on the job of ferreting out these frivolous cases. This likely stems from the deep cuts that Congress has imposed in IRS enforcement efforts in recent years. During fiscal 2013, the IRS assessed $77.2 million in penalties against 15,448 filers. Moreover, the previous year, the IRS assessed 25,546 penalties that totaled $127.7 million.
“Actions are needed to better identify and address individuals who file tax returns using frivolous arguments,” the inspector general concluded.
Here are seven of the most frivolous claims made by IRS scofflaws:
- Many have claimed that the federal income tax system is “voluntary” and that they choose not to pay taxes. As tax experts have noted, it is not the payment of taxes that is voluntary but rather the manner in which people may submit their tax returns. The taxpayer is responsible for computing what he or she owes – and risks adverse action for filing fraudulent returns. While the U.S. tax system technically is “voluntary,” refusal to comply carries stiff penalties.
- Nearly 3,000 people, many of them presumably black, have invoked the nation’s past sins of slavery to claim major tax exemptions or returns. The filers submitted a tax return, an amended return or correspondence referring to a reparation settlement with descendants of slaves based on the socio-economic impact of slavery. The IRS said these claims had a “fictional legal basis.”
- Then there are people who try to play a semantics game with the IRS. These filers argue that they are not a “person” or “individual” within the meaning of the federal tax code and they are therefore not subject to income taxes. Some 90 people tried this gambit in recent years but struck out. Unless they could prove they were Martians or some other alien being, they had no choice but to pay their income taxes.
- A couple of dozen people sought to avoid their tax obligation by taking the Fifth. These recalcitrant citizens asserted their Fifth Amendment constitutional right against self-incrimination as the basis for not providing any financial information. However, IRS officials did not buy the argument and went after them to meet their obligations.
- One of the more enduring tax dodges is the withholding of tax payments as a protest against government action or inaction. In a strategy that likely dates back to the Vietnam War and before, conscientious objectors to war or other controversial government action and policies have claimed they were justified in withholding taxes. That argument has fallen on deaf ears at the IRS.
- Hundreds of people complained that they already had paid more than enough in taxes into the Social Security system over the years and demanded a refund from the IRS to compensate for all those payments. Many of these filers requested a “lifetime earnings statement” from the Social Security Administration to use in making claims on payroll taxes that were automatically deducted from their paychecks over the years. The IRS dismisses these claims as more legal fiction.
- Finally, there were more than 1,200 dubious jailhouse filings over a three-year period from prisoners claiming refunds based on their estimates of the minimum wages they should have received for hours worked within their prisons. Using a substitute W-2 Form called Form 4852, these prisoners also provided a guesstimate of how much an employer would have withheld from their paychecks if they had been working on the outside for minimum wage. The IRS rejected these claims as more fantasy accounting.