Penalty for Frivolous Filings Applies to Returns Made on Behalf of Other Taxpayers

(Parker Tax Publishing April 2023)

The Tax Court held that a taxpayer who, in his capacity as the trustee of a grantor-type trust, filed frivolous income tax returns for a taxpayer, was liable for penalties under Code Sec. 6702(a). The court found that Code Sec. 6702(a) imposes a penalty on a person who files "what purports to be a return" and the taxpayer's filing of the frivolous returns on another taxpayer's behalf fell within the meaning of that provision. Stanojevich v. Comm'r, 160 T.C. No. 7 (2023).

Background

In 2013, Srbislav Stanojevich submitted a request to the IRS for an employer tax identification number (EIN) for Source Financial Trust (SFT). Stanojevich represented that SFT was a grantor type trust and that he was SFT's trustee. The IRS assigned an EIN to SFT. Stanojevich later filed with the IRS a Form 1041, U.S. Income Tax Return for Estates and Trusts, for years 2009-2012. Stanojevich filed those returns on behalf of SFT. He reported on the returns that he was SFT's trustee and signed the returns as SFT's "Authorized Representative."

The respective returns for the subject years reported interest income (and SFT's total and taxable income) of $40,709, $48,096, $57,091, and $58,176. Each return also reported that SFT had federal income tax withheld in an amount equal to the amount of the interest/total taxable income reported on the return, that SFT's "total tax" for the year was zero, and that SFT was entitled to receive an overpayment equal to the amount of the withheld tax. The returns included as attachments various Forms 1099 that Stanojevich had prepared and that reported payments to and from SFT. Some of the Forms 1099 also reported the amounts of withheld federal income tax that the returns reported were withheld federal income tax.

The IRS determined that the Forms 1099 were false and that each income tax return was frivolous for purposes of Code Sec. 6702(a). The IRS therefore assessed against Stanojevich a penalty of $5,000 for each subject year. Stanojevich received a Letter 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (NFTL). In response, he requested a collection due process (CDP) hearing. A settlement officer with the IRS Office of Appeals (Appeals) held the requested CDP hearing with Stanojevich. In 2017, Appeals issued to Stanojevich a notice of determination sustaining the NFTL filing.

Stanojevich petitioned the Tax Court as to the notice of determination. The court remanded the case to Appeals for the purpose of clarifying the determinations with respect to verification requirements of Code Sec. 6330(c)(1) for the Code Sec. 6702 assessments. The same settlement officer held a second CDP hearing with Stanojevich and issued a supplemental notice upholding the NFTL filing. Before issuing the supplemental notice, the settlement officer reviewed IRS transcripts and other computer records showing as to the penalties that a notice and demand, an NFTL filing, and a notice of a right to a CDP hearing were issued to Stanojevich. She also verified for each subject year that assessments of the penalties were properly made under Code Sec. 6201 and Code Sec. 6751(b)(1) and that the penalties had not been fully paid.

In the Tax Court, Stanojevich and the IRS disputed whether Stanojevich was liable for the Code Sec. 6702(a) penalties that the IRS determined with respect to the income tax returns Stanojevich filed for SFT. Stanojevich argued he was not liable for the Code Sec. 6702(a) penalties because they stemmed from the income tax returns of another taxpayer. He also contended that the settlement officer failed to verify that the penalties had been properly assessed as required under Code Sec. 6330(c) because he never received a Form 23 - C, Assessment Certificate-Summary Record of Assessments, showing that any of the penalties have actually been assessed.

Analysis

The Tax Court held that Stanojevich was liable for the penalties under Code Sec. 6702(a) because his filing of the frivolous returns on behalf of SFT fell within the meaning of that provision. Therefore, the court sustained the filing of the NFTL.

The court found nothing in Code Sec. 6702 that conditions the applicability of Code Sec. 6702(a) on a person's filing of his or her personal income tax return. The court noted that, in fact, Code Sec. 6012(b)(4) supported the court's contrary reading through its mandate that the return of a trust "shall be made by the fiduciary thereof" or in other words, by its trustee. In the court's view, the fact that Congress has directly placed on a trustee the duties and responsibilities associate with the filing of the trust's income tax return supported the conclusion that Congress considered it appropriate also to impose Code Sec. 6702(a) liability on a trustee who files a frivolous income tax return on behalf of the trust. As the trustee/beneficiary of SFT, Stanojevich was responsible for the filing of SFT's income tax returns. Given that he was in fact the one who actually did file those returns, the court held that he was also the one who may properly be subject to a penalty under Code Sec. 6702(a).

The court rejected Stanojevich's argument that the settlement officer failed to verify that the penalties had been properly assessed. Rather, the court found that the settlement officer reviewed the IRS's transcripts and other computer records for Stanojevich, as well as his administrative file, and concluded that the IRS had properly assessed Code Sec. 6702(a) liabilities and met all other applicable requirements. The court noted that Stanojevich's argument that the IRS must produce a Form 23-C to prove that an assessment was made properly was rejected by the Tax Court as frivolous in Carothers v. Comm'r, T.C. Memo. 2023-165. In addition, the court noted that in Nestor v. Comm'r, 118 T.C. 165 (2002), the Tax Court explained that a settlement officer does not abuse his or her discretion when, to obtain the requisite verification, he or she relies on an IRS transcript, rather than producing or relying upon a Form 23-C. The court found that Code Sec. 6330(c)(1) does not require the settlement officer to rely upon a particular document in order to satisfy this verification requirement. In the court's view, the settlement officer's verification that Stanojevich's liabilities were correctly assessed was proper, and Stanojevich failed to allege any irregularity in the IRS's assessment procedures that would call into question the validity of the assessments or the information in the transcripts.

For a discussion of penalties relating to frivolous tax submissions, see Parker Tax ¶262,145. For a discussion of the rules for appealing a levy, see Parker Tax ¶260,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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