Sovereign Immunity and Unpaid Taxes

Posted on July 23, 2015

In a tax case, the taxpayer promoted tax-avoidance schemes and claimed that he was a sovereign “living soul” who was not a citizen of the United States or of the State of Arkansas and was not a party to the United States Constitution.

He engaged in these tax-avoidance schemes in order to not pay taxes to the IRS. However, the government retains sovereign immunity in order to protect the Treasury and its discretionary governmental functions.

The IRS Criminal Investigation Division found that the taxpayer’s tax-avoidance schemes had no valid business purpose and, in fact, were illegal. The taxpayer pled guilty to one count of willfully attempting to evade or defeat his individual income tax. The IRS subsequently came after the taxpayer for the unpaid taxes for the years in which he engaged in the tax-avoidance schemes.

The taxpayer, in addition to making tax protest-type arguments as to why he should not be held liable for the tax, also argued that his unpaid taxes should be reduced by the amount of restitution ordered by the Court in his criminal case. Putting aside the taxpayer’s tax protest-type arguments, the Tax Court held in favor of the IRS because the restitution was separate and apart from the tax liability the taxpayer owed for the years in issue.

The Tax Court also held the taxpayer liable for the Fraud Penalty which is 90% of the tax due for the years in issue.

The only break that the Tax Court gave to the taxpayer in this case was to not assess a penalty for making a frivolous argument, preferring instead to issue a warning to the taxpayer to no longer make frivolous arguments in the future.

Do you think that the Tax Court was harsh or fair in this case, especially when dealing with a convicted tax evader?