Crazy Tax Court Cases

After I finish writing the stories (and editing the contributions) each Sunday evening, I send them to a group of volunteer editors so they can check them that evening, or Monday morning (well before the newsletter comes out). They catch a lot of the typos, poor construction, and other goobers. (They only read the stories, not the Comments section or Honorary Unsubscribe, since there isn’t time to send that text to them before publication.)

The group includes my wife, my brother, and a couple of people who have done editing as a profession, just to get several different sets of eyes on the text: what one might miss, another will probably catch.

This week, there was one story that caught one editor’s eye, about a tax fraud case, which I’ll include here to give you a starting point:

Withholding Judgment

When he filed his 2016 federal tax return, the Internal Revenue Service says, Ramon Christopher Blanchett, 29, of Tampa, Fla., reported he had earned $1,399 from one job, from which no federal tax was withheld, and $17,098 in wages from another job, from which $1,000,000 of federal tax was withheld. The IRS dutifully sent him a refund of exactly $980,000. Blanchett kept the money in the bank and, when he didn’t hear anything by late 2018, bought himself a Lexus sport coupe. By the time the IRS caught up with him, it impounded the Lexus, and $919,251 left in his bank accounts. So far, Blanchett has not been charged with any crime. (RC/Tampa Bay Times) …Wait: the tax on $18,497 is exactly $20,000? No wonder it’s so hard to stay above the poverty line.

The editor replied with a bunch of cases from first-hand knowledge as a court reporter. I replied, asking if I could publish the line-up as a guest blog post. The editor agreed, and at my request wrote a brief introduction, but wants to remain anonymous. “It’s not that any of this is confidential; it’s all public information.” But then, who wants to have their name attached when making fun of criminals? Unless (cough) it’s their profession, and have been doing it weekly for decades….

Crazy Tax Court Cases

by Anonymous

For a number of years, I worked as a court reporter in U.S. Tax Court, primarily in the 1980s and ’90s. The judges are based out of Washington DC, and periodically collect a week or two’s worth of small cases to hear in a city somewhere around the country. Most of the people who bring their cases to Tax Court don’t have an attorney, but most of the judges, at least in my day, were kind and helpful to them, and when a taxpayer had a legitimate case, they could frequently win. What I found interesting was that a surprising number of people just want to be heard — even though they know they’ll lose.

Crazy Tax Court Cases
The seals of the U.S. Tax Court and the Internal Revenue Service. As you can see, the IRS eagle must watch the rulings of the court.

It was actually a fascinating court because of the massive varieties of ways people complain about their taxes. But because of a small group of people who want to avoid paying any taxes, the tax protesters are always represented. They come in every size and shape, and I understand that today many types of tax protest never make it to the courtroom to waste the judge’s time. But when I was covering court sessions throughout the Midwest, the tax protest movement was in full bloom. Here is just a small collection of types of protest I personally ran across.

My favorite witness was the drug dealer who was charged with millions in taxes on unreported income from drug sales; he couldn’t come to court because he was in prison in the Dominican Republic. But another drug dealer, a current inmate in a U.S. prison, was brought in to testify against him — and testified chained to the witness chair.

The judge asked this witness, just for amusement, I think, whether he had filed his taxes for the years he was dealing. His response? He not only filed, but he paid his taxes on the drugs he dealt! The judge wondered how in the world he’d done that, and he responded that he declared the income as “selling fruit”! He was obviously more afraid of the IRS than the cops. Which about brought the house down, as you can imagine!

So to this day I think about the guy “selling fruit” to pay taxes on his illegal income. I only wish the people who shelter income by moving it to a tax haven could meet that honest drug dealer!

The Cases

  1. For a while, tons of people were creating fake churches and claiming all their bills and expenses as tax-exempt. That one backfired magnificently and painfully on some people — for example, a young couple who only owed $3,000 in taxes for the year their “church” existed. By the time they chose to litigate it in Tax Court — where you can litigate your case without paying the alleged taxes due first; you can also go to U.S. District Court, but have to prepay the taxes — and several years passed, by the time their case was heard and IRS penalties and assorted fees were added, they ended up owing $40,000. And they lost their case, of course.
  2. There was the crazy who refused to give the IRS his address, which was his legal right. In order to prevent them from finding his home and descending on him to collect missing years of taxes on undisclosed income, he had to drop out of the system. No phone, utility bills, credit cards, anything to identify his location. He did come to court with a bunch of his supporters; the U.S. Marshals said they took a frightening collection of weapons off them. I identified the most solid place in the courtroom to hide behind if someone still snuck something in!
  3. There was a man who said the judge was hearing the case under admiralty law because the flag (like all permanent courtroom flags) had a gold fringe. Sure.
  4. There were tons of people who said the IRS paperwork didn’t apply to them because it addressed them using capital letters, which meant something complicated I’ve forgotten, it was so stupid. Except that all-caps person “wasn’t them.”
  5. My favorite attempted intricate tax shelter in which people invested in series of biotech companies, claiming the full amount invested in the first year even though they only invested a few thousand, and the rest would be due when the note matured in a few years — but payable in Brazilian currency, which because of hyperinflation meant their $250K investment would end up being a couple thousand at most. Yet they had claimed the full $250K and gotten whopping refunds and whatnot in the first year. The judge admitted it was the most creative way to cheat on taxes, but they still lost.

If you want to learn more, just look up tax protesters online. There is a simply ridiculous number of ways people dream up to get around their taxes. It’s pretty crazy! And most are obviously stupid and obviously illegal, but people try them anyway. I never understood it!

But I did learn (1) to always file on time even if you can’t pay, (2) save your records for 7 years, the statute of limitations for fraud, even if you’re totally honest, (3) document, document, document, and (4) it’s just not worth it to cheat because if you get caught, you will really regret it!

Randy here again. I’ll add 1a) to the list just above: if for some reason you can’t file, at least pay! If the fools in #1 had done that, they would have owed $3,000 when they came out the other end, rather than $40,000.

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10 Comments on “Crazy Tax Court Cases

  1. Randy, your final addition is wrong, actually. They still would have been assessed fines and penalties, although probably not fees because those accumulate yearly on the taxes owed, which is usually a minimum of 5 years — the IRS usually only files a case weeks before the 3-year statute of limitations expires, and then it takes a couple of years to exchange paperwork and wait for a nearby court session to be scheduled. But they would still owe a bunch.

    And depending on how greedy they were with their “church” (like the couple who got caught when even charged their kids’ birthday presents to it), they could end up charged with fraud as well. Which has a 7-year statute, and can result in jail plus monetary penalties, unlike civil cases, where jail isn’t included.

    So the couple in #1 could have greatly reduced what they owed, but they still would have had to pay a bundle. Just a smaller bundle.

    For more details, ask a tax lawyer, which I’m not!

    Thanks for the clarification. However, I’ll maintain that it’s still smart to pay if, for any reason, you can’t file your return. -rc

  2. In case anyone is curious, the ALL CAPS name thing apparently has its roots in something called “Strawman theory.” I did some googling on it, and the first page I found was just talking in circles about it, although the Wikipedia page on the topic is a little easier to understand.

  3. I work for a debt collection agency — on the Litigation Mail team, not the part that has to actually call people and convince them to pay us; I just open the mail and send it to the paralegals and attorneys. I have seen similar things in the letters — the ways people try to get out of paying their debts are hilarious and mind-boggling at times.

    One of the very first ones I ever saw was actually the all-caps thing! She insisted that printing her name on the envelope in all caps constituted “MAIL FRAUD” because it “turns her into a CORPORATION when she is NOT a CORPORATION she is a FLESH AND BLOOD HUMAN BEING” (and that is a direct quote that has burned itself into my brain, punctuation, capitalization, and all!) and that therefore she didn’t owe us money. I believe she also insisted that she “did not live in the state of Florida” (of course it was Florida) but had a “temporary residence” in some place that turned out, when I Googled it, to be a micro-nation — someone had declared a three-block area of Miami, wherein she presumably lived, to be a sovereign nation and therefore exempt from the laws of the United States.

    I’ve seen sermons — well-written, color-coded, well-sourced sermons citing all kinds of Biblical reasons why God would want us to forgive their debt. Multiple sermons. Including one couple who actually filed a legal answer to a complaint with the court citing the Bible verse stating that all debts must be forgiven after seven years as a reason why they didn’t have to pay the money back. (While, yes, there’s a seven-year statute of limitations (less in some states) on being able to sue someone on a debt or report it on their credit history, that goes from the date of last payment, not from when you open the account.) There was a man who sent in a legal contract indicating that he had entered his name into the “Lamb’s Book of Life” and that as part of that contract, all debts were forgiven (it was very official-looking, too, signed and notarized). There was also the person who wrote ONLY JESUS CAN SAVE YOU in big, bold letters on the inside of the envelope, at the bottom of the stipulation they had signed, and across the money order they sent in, legitimately terrifying me into wondering what they had done to it.

    I once saw a letter from someone who insisted that he couldn’t repay his debt with US currency because, under some law or statute or regulation, debts could only be repaid with “things of actual value” and money didn’t have any physical worth. I stared at that one for a good minute before I just put it back in the envelope and sent it along to the Disputes team.

    Someone once sent in what I thought at first was an actual check and almost passed on to the media team before something caught my eye and I pulled it out. It was a hand-drawn “check” for one million dollars — drawn on the “[Expletive Deleted] Bank,” with an account number and routing number that contained mostly ones and zeroes with a few “666”s thrown in for good measure, and accompanied by a note telling us to “share it with our friends” and signed “Donald J. Trump” (this was at least three years ago). I took it up to my boss and asked her if I really had to push this through to another team; she started to read it, stopped, covered her mouth with one hand as her eyes widened, handed it back to me, and said, “I don’t want to scan this. Just shred it.” (There was no actual account number on it, so it wasn’t like we could attach it to an account anyway.)

    There was also the guy who simply sent back the statement we sent him with “I owe this money, but I’m not going to pay it” written on the bottom. I have to say, the honesty was refreshing.

  4. First penalty: failure to file on time — 5% of taxes owed PER MONTH to a maximum of 25%. Second separate penalty: failure to pay on time — 0.5% (1/2%) of taxes owed per month to a maximum of 25%. Much better to FILE, even if you can’t PAY.

    Paying the $3,000 plus fines and penalties assessed to that point when notified would STOP the fines and penalties (because return is filed, ending that penalty, and taxes are paid, ending that penalty). Litigation can then go forward to the end, one way or another, win or lose. HOWEVER, it’s a whole different ball game with separate penalties if fraud, intent to commit fraud, and frivolous litigation enter the picture. That’s how the penalties rose to $40,000 in the first place.

    The take-away: Be honest to start with. It will almost always turn around and bite you in the end. IRS has some frightening powers to levy your wages and property if you buck the system too hard — and they are not afraid to use them. That doesn’t mean you have to give them more than you need to — there are many legitimate credits and deductions and you should use every single one of them that will give you a tax advantage. And, if you do receive a letter from the IRS, DO NOT ignore it and hope it will go away. It won’t. It just grows.

    I have been a professional tax preparer for over 15 years, and I have seen most every tax dodge out there. In the long run, it just doesn’t help, and you can spend an awful lot of money and time just fighting the consequences of trying to shave $100 off your tax bill illegally!

  5. The “Withholding Judgment” story has the total income at $18,497. My calculation is $19,196. Am I missing something?

    No, my typo: I looked at the wrong number. The first job income was $1,399, not $2,098. Fixed in the story, and thanks! -rc

  6. Unrelated to taxes, there was a recent case in which a lawyer, representing himself (first mistake), decided to fight paying the $300 he owed a paralegal. By the time he finally came to his senses and realized he (a) never should have fought the payment in the first place, and (b) if he was going to fight it anyway, he *never* should have represented himself, he spent over six figures.

    Stupidity is apparently present in *every* arena where money is involved!

    Reading the Wikipedia page on the strawman theory, I was reminded the other most popular reason to fight paying taxes, the whole Sovereign Citizen mess. I am *very* glad to see that using some of these totally spurious and often nonsensical arguments, usually couched in painfully complex fake legalese, now draws an automatic penalty. I realized it was first enacted and available during my period reporting in Tax Court; too bad the judges didn’t know about it!

    But the judges could be very fair to plaintiffs arguing a small amount when the circumstances made sense and the plaintiff was honest. I’ll never forget the older server at a restaurant near a military base. She had been assessed a percentage of her tips as tax, but she pointed out that the young men left smaller tips for an older lady than a young, cute server. The judge issued a bench decision in her favor. It’s people like her who benefit most from Tax Court. I was really happy for her; I bet she’s a better server than the young, cute ones who spend most of their time flirting!

  7. Three and four are standard Sovereign Citizen tactics, which is my most recent favorite brand of crazy. YouTube “Sovereign Citizen fails” for a whole lot of laughs.

  8. Blanchett is clearly guilty of SOMETHING. If he mailed in the return, that’s mail fraud IMO; if he filed electronically, it’s wire fraud. And if he says he didn’t know the return was fraudulent, (a) too bad, he signed it, and (b) he should be charged an “idiot tax” like Cincinnati’s Judge Nadel did while he was still on the bench.

    I’m a tax preparer, and I simply won’t deal with any of the “tax protester” claptrap. Anyone who even mentions such strategies gets an automatic invitation to leave my office (the most recent one was about 4 years ago, a “Sovereign Citizen” believer). I’m too honest to participate, and too old to go to jail. If tax documents look wrong, I assume they ARE wrong.

    I’m a believer in “you make the money, you pay the tax, you enjoy what’s left”. Fortunately, most of my clients are that way, too. They all grumble, as do I, but they’d rather pay and be done with it.

    I don’t think the feds have to weigh mail vs wire fraud when tax fraud works so well. But yeah, an Idiot Tax would be something good to tack on! -rc

  9. Blanchett is also guilty of impatience. With the statute of limitations 3 years for examination of returns and 7 years for fraud, he spent the money without giving the IRS time to get around to his return. I got audited once many years ago and the notice of audit was filed with only 2 weeks left of that 3-year period. And nearly every case I reported was similarly running up against the statute.

    He did one thing right, putting the money in the bank and leaving it for 2 years. Unfortunately, no matter what else he did or didn’t do, he was impatient to spend it and just added many thousands in penalties (his “idiot tax” — what a great judge!) to the already large sum he has to repay. If he doesn’t go to jail, I hope he enjoys living on ramen noodles!

    Ramen is a highly prized item in jail, too! -rc

  10. Another tax preparer here, and ditto on the advice to file on time (and pay on time, if possible). If the church couple had filed and paid and then appealed — they would still have lost their case, obviously, but it’s very unlikely they would have owed anything near $40k. Much would depend on whether the IRS assessed — and the court accepted — the civil ‘fraud’ penalty, which is 20 or 25% of the tax owed. (I don’t recall exactly what it’s called but civil fraud is the essence, and it’s an administrative penalty, not something that relies on a court conviction).

    Good to see that the IRS regards the Strawman argument as prima facie frivolous and fines people for using it. I’ve read through some of the tax protesters writings and they are generally circular and not persuasive (except to them, of course).


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