Ex-CPA Tax Protester Slammed With Fraud Penalty and $25,000 Sanction.

(Parker Tax Publishing January 22, 2015)

A well-known tax protestor's failure to file his tax returns was deemed fraudulent, resulting in a 75 percent civil fraud penalty under Code Sec. 6651(f). An additional $25,000 penalty under Code Sec. 6673 was assessed as a sanction for his persistent frivolous contentions before the Tax Court. Banister v. Comm'r, T.C. Memo 2015-10.

Background

It's tough to tell whether Joe Banister's star is rising or falling. On the one hand, he's been losing professional certifications and piling up six-figure tax assessments at a frightening pace. On the other, he's becoming something of an icon in the tax protester community, garnering coverage in the New York Times and other national publications.

Banister had an impressive early career as an accountant. He became licensed in California as a CPA in 1991, worked as an auditor for KPMG for three years, and was an IRS special agent in the Criminal Investigation Division from 1993 to 1999.

In 1999, Banister authored a book entitled "Investigating the Federal Income Tax: A Preliminary Report" in which he espoused tax protestor beliefs, including arguments that the payment of Federal income tax is voluntary, the Sixteenth Amendment was not legally ratified, and Government financing operations are unconstitutional. He ultimately resigned from the IRS and rose to fame as a champion of the tax protestor movement, providing tax consultation services, speaking at conventions throughout the country, operating Web sites, and selling books, CDs, and DVDs setting forth his views on income tax and the Internal Revenue Code.

In December 2003, Banister was disbarred from practice before the IRS after findings that he advised taxpayers to rely on frivolous positions, similar to those advanced in his book, and a determination that his advice constituted disreputable conduct. The same conduct that led to his disbarment also led the California Board of Accountancy to revoke Banister's CPA license in 2007. Banister filed unsuccessful challenges to that decision with the California Court of Appeals, the California Supreme Court, and even the U.S. Supreme Court.

From 2003 through 2006, Banister capitalized on his fame as a tax protester, earning income from his tax consultation services, speeches, book sales, and other business activities promulgating his views of the Federal income tax system. In keeping with his beliefs, Banister failed to file returns for those years and failed to submit to examination on audit. In response, the IRS prepared substitute returns using the bank deposit method after examining six bank accounts. The IRS determined that taxable deposits of $143,607, $177,402, $130,502, and $87,389 had been made for 2003, 2004, 2005, and 2006, respectively. Those amounts were used in the statutory notice sent to Banister, who challenged the determinations before the Tax Court.

Analysis

Banister claimed the statutory notice the IRS sent him was invalid because it was not signed by an authorized person and as a result, the court lacked jurisdiction over his case. The court quickly rejected that argument, relying on the fact courts have consistently held that a signature is not required on a notice of deficiency. The court then turned to the issue of whether Banister's failure to file returns for 2003 through 2006 was fraudulent and subject to the penalty under Code Sec. 6651(f).

Banister argued that his U.S. income was not subject to tax and that he had no obligation to file tax returns, repeating or restating the arguments that had led to his disqualification to practice before the IRS and the loss of his CPA license.

Code Sec. 6651(f) provides for a civil penalty of 75 percent of the amount required to be shown as tax on unfiled returns if the failure to file the returns is fraudulent. Code Sec. 6673 provides for a penalty up to $25,000 if the taxpayer makes frivolous arguments in U.S. Tax Court. Fraud may be proved by circumstantial evidence, and the taxpayer's entire course of conduct may establish the requisite fraudulent intent. Circumstantial evidence includes "badges of fraud" such a longtime pattern of failure to file returns, failure to report substantial amounts of income, failure to maintain adequate records, failure to cooperate with taxing authorities in determining the taxpayer's correct liability, and implausible or inconsistent explanations of behavior (Bradford v. Commissioner, 796 F.2d 303 (9th Cir. 1986)).

The Tax Court concluded that the IRS properly assessed deficiencies and a 75 percent penalty under Code Sec. 6651(f) on amounts due for Banisters fraudulent failure to file. The court reasoned that Banister failed to provide a plausible nonfraudulent explanation for his behavior, as he refused to testify. The court also pointed to his persistence in advancing continuously discredited arguments as negating any good faith defense to the inference of fraudulent intent.

Further, the court determined that the additions to tax penalty under Code Sec. 6673 were proper given Banister's persistent frivolous contentions and the fact he failed to present evidence or arguments showing a reasonable dispute as to the income, tax, penalties, or additions to tax determined in the statutory notice. The court acknowledged that adding the $25,000 penalty to Banister's existing substantial tax debt may fail to dissuade him personally, but underscored the secondary value such sanctions can play in warning other taxpayers to avoid similar tactics.

For a discussion on penalties relating to frivolous tax submissions, see Parker Tax ¶262,145. (Staff Editor Parker Tax Publishing)

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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