The Section 6673 Penalty: When Tax Court Arguments Cost Up to $25,000

The Tax Court is a remarkably accessible court. Taxpayers can file without a lawyer, pay a modest fee, and have their case heard by a judge who hears tax cases every day. That accessibility has a cost: the Court sees a steady stream of petitions built on arguments that courts have rejected for decades.

IRC 6673 is Congress's answer. It lets the Tax Court penalize taxpayers who use the Court for delay or frivolous positions, and it lets the Court sanction attorneys who multiply proceedings unreasonably.

The statute

IRC 6673(a)(1) says that whenever it appears to the Tax Court that:

• proceedings were instituted or maintained by the taxpayer primarily for delay,
• the taxpayer's position is frivolous or groundless, or
• the taxpayer unreasonably failed to pursue available administrative remedies,

the Court, in its decision, may require the taxpayer to pay the United States a penalty not in excess of $25,000.

The penalty is discretionary. The Court decides whether to impose it and how much, up to the cap. It is imposed in the Court's decision, not assessed through the usual deficiency process.

What "frivolous" means in practice

A frivolous position is one contrary to established law and unsupported by a reasoned, colorable argument for change in the law. The Court distinguishes sharply between a taxpayer who is wrong and a taxpayer who is frivolous. Losing a genuine dispute about whether an expense was ordinary and necessary is not frivolous. Arguing that wages are not income is.

The IRS publishes a list of positions it treats as frivolous under IRC 6702(c), most recently in Notice 2010-33, and current IRS procedures continue to rely on that list. Positions on it include claims that:

• Wages, tips, or other compensation for services are not income.
• Filing a return or paying income tax is voluntary.
• Only certain people, such as federal employees or residents of federal territory, are subject to the income tax.
• The Sixteenth Amendment was not properly ratified.
• Federal Reserve Notes are not taxable income.

Courts have rejected these arguments repeatedly. Raising them in Tax Court invites a 6673 penalty.

Warnings usually come first

The Tax Court often warns a taxpayer before imposing the penalty, either in an order or from the bench, explaining that the position is frivolous and that continuing to press it may lead to a penalty. A taxpayer who abandons the argument after a warning frequently avoids the penalty. A taxpayer who continues after a warning, or who has been warned in prior cases, is a much more likely candidate for a substantial penalty.

Here's the part most people miss: the penalty is often imposed in cases the taxpayer would have lost anyway. It is not a substitute for the deficiency. It is in addition to it.

Delay and failure to pursue administrative remedies

The other two prongs get less attention but matter. A taxpayer who files a petition only to delay collection, without any genuine dispute, can be penalized. So can a taxpayer who unreasonably failed to pursue available administrative remedies, for example by ignoring every opportunity for Appeals review and then using the Court as the first forum for a dispute that could have been resolved administratively.

CDP cases are a common setting

Many 6673 penalties arise in Collection Due Process cases. Congress addressed frivolous CDP requests directly. IRC 6330(g) lets the IRS treat any portion of a CDP hearing request that rests on a position identified as frivolous, or that reflects a desire to delay or impede tax administration, as if it were never submitted, with no further administrative or judicial review of that portion. IRC 6330(c)(4)(B) bars raising such issues at the hearing.

IRC 6702 adds a separate civil penalty, assessed by the IRS, of $5,000 for frivolous tax returns and for specified frivolous submissions, which include CDP hearing requests, offers in compromise, installment agreement requests, and applications for a taxpayer assistance order. That penalty is separate from anything the Tax Court imposes under 6673.

The lesson for Form 12153: state real reasons. A hearing request built on frivolous theories gets disregarded and can draw penalties, while the same taxpayer with a genuine hardship or payment proposal could have obtained real relief.

A real dispute buried in a bad argument

Many petitions that draw 6673 warnings contain a legitimate issue underneath. A taxpayer who argues that wages are not income may also have unclaimed business expenses, an incorrect information return, or a basis computation the IRS got wrong. Those are real disputes, and the Tax Court will hear them.

The practical fix is to strip the case down to the issues that can be won. Concede the theory, keep the facts. Judges respond to taxpayers who narrow the case, and a narrowed case is far less likely to draw a penalty. If an amended petition is needed to remove frivolous claims and state the real assignments of error, Rule 41 allows amendments with leave of Court.

Sanctions on counsel

IRC 6673(a)(2) applies to attorneys and others admitted to practice before the Tax Court. If one multiplies the proceedings unreasonably and vexatiously, the Court may require that person to pay personally the excess costs, expenses, and attorney's fees reasonably incurred because of that conduct. If the attorney is appearing for the Commissioner, the United States pays. The provision cuts both ways.

Other courts

IRC 6673(b) gives district courts authority to impose a penalty of up to $10,000 when a taxpayer's position in a suit for damages under IRC 7433 is frivolous or groundless. Outside the Tax Court, other sanctions rules also apply.

How to stay well clear of 6673

• Dispute facts and law, not the legitimacy of the tax system. Substantiation, valuation, characterization, and the application of specific Code sections are all legitimate.
• Use administrative remedies. Respond to 30-day letters, request CDP hearings properly, and engage with Appeals.
• Heed a warning. If the Court signals that an argument is frivolous, withdraw it.
• Be wary of promoters. Anyone selling a theory that you do not owe income tax at all is selling a penalty.
• Talk to counsel about genuine disputes. Most taxpayers who end up near the frivolous line had a real issue buried under a bad argument.

If your real problem is penalties already assessed, look at abatement rather than litigation theories. The firm's overview of IRS penalty abatement covers the legitimate routes.

Let's talk

The Tax Court is a fair forum for genuine disputes. If you have received a warning from the Court, or you are not sure whether an argument you have read about is legitimate, call (813) 229-7100 before you file anything. Let's talk.