Tax Court finds IRS computer-generated penalties valid without supervisory approval
The Tax Court recently ruled against a married couple that tried to garnish the salary of the Secretary of the Treasury to pay their tax bills.
Craig and Maria Walquist submitted to the Tax Court “various documents containing assertions commonly advanced by tax protesters, including assertions that U.S. currency is not ‘lawful money’ and that they ‘have no obligation or liability to even file a return’ because they ‘intend to only handle legal money.’” But in its ruling in the case (Walquist v. Commissioner, 152 T.C. No. 3), the Tax Court gave Walquists credit for advancing “the more novel (but equally frivolous) argument that this Court should garnish the wages of the Secretary of the Treasury for an amount equal to petitioners’ outstanding tax liability.”
The novel position did them no good, however. The Tax Court granted the IRS motion to dismiss, making them liable for taxes of $13,832, an accuracy penalty of $2,766, and a $12,500 penalty under section 6673(a)(1) of the Tax Code for repeatedly advancing frivolous positions during the case.
On their 2014 return, the Walquists failed to report $1,215 of unemployment compensation received from Minnesota. They reported wages and other gross income totaling $94,114, with a deduction of $87,648, which they labeled “Remand for Lawful Money Reduction.” After the standard deduction they reported negative taxable income of $5,731.
Alerted to the underreporting by computer document matching, the IRS processed the examination of their return through its Automated Correspondence Exam (ACE) system, employing its Correspondence Examination Automated Support software program. The program is designed to process cases with minimal to no tax examiner involvement until a taxpayer reply is received, according to Internal Revenue Manual pt. 184.108.40.206.1, which was quoted by the Tax Court.
The computer program generated a 30-day letter inviting the Walquists to reply and to submit relevant information. When the Walquists failed to respond, the program generated and issued a notice of deficiency, which again invited them to contact the IRS. They again declined to do so.
The Walquists petitioned the Tax Court, but refused to participate in any pretrial process. In answer to the court’s order to show cause in writing why their case should not be dismissed for lack of proper prosecution, they submitted a document captioned “True Bill of Indictment — Testimony Inherent,” again demanding garnishment of the wages of Treasury Secretary Steven Mnuchin. In addition, they asserted that the Tax Court lacks authority to decide the case, among other frivolous and “incoherent” demands.
The Tax Court held that under section 6662(a) and (b)(2) of the Tax Code, the penalties determined by an IRS computer program without human review are “automatically calculated through electronic means” within the meaning of Code section 6751(b)(2)(B) and thus are exempt from the written supervisory approval requirement.
The court granted the IRS’s motion to dismiss for lack of prosecution, granted the deficiency and penalty determined by the IRS, and tacked on the frivolous position penalty.