Tax Law Special Report: March 2014

Just.  Don’t.  Do.  It.

“It” is: file an individual tax return with a “Substitute For” Form W-2 (the one that is used to report wages) reporting that zero wages were paid, but claiming that taxes were withheld, and a Form 1099-B (the one that is used to report proceeds from brokerage transactions) that has been altered by replacing the amount of gross proceeds (over $5,000 in this case) with zero.

Mr. Waltner did this and claimed he owed no income tax.  It didn’t work.

Of course, once you have done that, there’s no reason to not go all out, right?  So Mr. Waltner also claimed on the same tax return that he was due a refund of over $10,000, which included Social Security and Medicare taxes that were withheld from the three jobs he held during the tax year.

How were Social Security and Medicare taxes withheld when he was paid no wages?  Mr. Waltner’s explanation was that the people who paid him retained money from his “non-wage pay.”  He also claimed that he was neither an employee nor a “United States Person” and therefore wasn’t required to pay income tax.

The IRS imposed a frivolous submission penalty against Mr. Waltner.  Mr. Waltner appealed to the Tax Court.  The Tax Court upheld the penalty and imposed an additional penalty against Mr. Waltner for taking “frivolous positions that have been repeatedly rejected by the courts.”

Mr. Waltner’s arguments sound like garden variety tax protestor stuff.  What made his case interesting was that the Tax Court discussed at some length Mr. Waltner’s use of arguments from a book titled Cracking the Code.

Here’s another don’t: don’t rely on a book that says you don’t have to pay income tax, when the book was written by someone who pleaded guilty to Conspiracy to Place Incendiary Device in U.S. Mail and Failure to File Federal Income Tax Return.  The tax judge put it very directly:

[W]hen taking positions based on a book, it is reasonable to inquire into the expertise of the author. Some authors are well-recognized tax experts who are cited by courts; others are not.

Nowhere in his book does [the author of Cracking the Code] set forth his credentials, other than on the back cover where he vaguely identifies himself as “researcher, analyst and scholar.” Add to that felon and serial tax evader.

The tax judge went on to give a lengthy dissertation on the contents of Cracking the Code (mostly the usual litany of tax protestor arguments) and a point-by-point explanation of why the author’s arguments will not work no matter how many times they are advanced.

Finally, on page 61 of his decision, the tax judge points out that Mr. Waltner followed the advice of the Cracking the Code author to the letter: make a “correction” to Form 1099 by declaring that the funds received were not taxable; create “substitute” W-2s by changing the amount of reported wages to zero; and file a Form 1040 that asserts no tax is owed, based on the altered 1099s and W-2s.

The tax judge concluded his discussion with this statement:

The positions advocated in Cracking the Code have routinely been rejected, with its author being criminally convicted and its adherents being sanctioned.

In other words, don’t rely on the contents of Cracking the Code as a way to avoid paying income tax, even if it does have a somewhat clever title.

Just in case you want to read it for yourself, the Tax Court decision is Waltner v. Commissioner of Internal Revenue, Tax Court Memo. 2014-35, filed February 27, 2014. I found it via the Taxprof Blog, at

Which reminds me, is Wesley Snipes still in prison, or is he out by now?



While we are on the subject of tax scams, and since it is tax season, the IRS recently released its annual “Dirty Dozen” list of twelve prevalent tax scams for this year.  Here’s the list, from the IRS news release (IR-2014-16, Feb. 19, 2014):

  • Identity Theft
  • Pervasive Telephone Scams
  • Phishing
  • False Promises of “Free Money” from Inflated Refunds
  • Return Preparer Fraud
  • Hiding Income Offshore
  • Impersonation of Charitable Organizations
  • False Income, Expenses or Exemptions
  • Frivolous Arguments
  • Falsely Claiming Zero Wages or Using False Form 1099
  • Abusive Tax Structures
  • Misuse of Trusts

The IRS news release closes with this cheerful reminder: “The IRS reminds taxpayers that tax scams can take many forms beyond the ‘Dirty Dozen,’ and people should be on the lookout for many other schemes. More information on tax scams is available at”



               I wasted time, and now doth time waste me.

William Shakespeare, Richard II