Tax Protestors and Penalties: Ensuring Perceived Fairness and Mitigating Systemic Costs

I. Introduction Each year hundreds of thousands of taxpayers use abusive schemes to avoid paying some or all of their federal income taxes. 2 Tax avoidance schemes include abusive tax shelters, fraudulent transactions, and approaches based on an erroneous belief that the federal tax system either is illegitimate or is inapplicable to certain taxpayers. Those who believe that the tax system is illegal or inapplicable are commonly referred to as tax protestors. The following excerpt is typical of the written statements that tax protestors include frequently with their tax returns and court filings: [THE TAXPAYER], UPON PRESENTMENT BY INTERNAL REVENUE, RETURNED AND REFUSED FOR CAUSE UCC 3-501 SAID PRESENTMENTS WITHOUT DISHONOR. IN ADDITION, [THE TAXPAYER], IS NOT A "U.S. CITIZEN" NEITHER IS HE A "RESIDENT NOR INHABITANT' OF THE U.S. AND HAS NO INCOME EFFECTIVELY CONNECTED WITH THE UNITED STATES THAT [THE TAXPAYER] DID NOT KNOWINGLY OR VOLUNTARILY ENTER INTO ANY AGREEMENT OR CONTRACT TO BE LIABLE FOR THE NATIONAL DEBT, OR "ELECTED' TO BE TREATED AS A RESIDENT OF THE UNITED STATES UNDER 26 CFR PART 5h; 26 USC, SECTION 6013(g) & (h) BY THE SIGNING OF FORM 1040 OR OTHER RELATED U.S. FORMS. [THE TAXPAYER] IS NOT A PARTY TO ANY TRANSACTION WITH THE U.S. LET THE U.S. PRODUCE THE ORIGINAL SIGNED CONTRACT [SEC.] 871 4(b) FURTHER PETITIONER SAYETH NOT. 3 Fortunately, most people in the United States pay their taxes when and in the amount required. Between eighty and eighty-five percent of all taxes owed ...