Sixteen months in the federal slammer and a lifelong tag as a convicted felon are a high price to pay for filing W-4s on which exempt status was falsely claimed and 10 1040s on which $0 income was reported.
Yet, that’s what an engineer won in the tax protester sweepstakes, as upheld by a federal appeals court. (U.S. v. Giambalvo, No. 15-1136, 8th Cir., 2016)
All systems not go. An aerospace engineer filed W-4s on which he falsely claimed exempt status. His employer then received a lock-in letter from the IRS, instructing it to withhold using single/zero status.
The IRS later contacted the employee about his 1040s, which hadn’t been filed in 10 years. He and the IRS eventually reached a deal under which he would file two returns every two weeks. He kept his part of the bargain, but the returns he filed claimed $0 income and requested a refund of the tax withheld.
The IRS threw the book at him, accusing him of obstructing and impeding the administration of the income tax laws.
He trotted out the old tax-protester trope to prove his innocence: He wasn’t guilty because he sincerely believed he didn’t owe federal taxes.
To prove his sincere belief, he wanted to introduce evidence that the IRS receives numerous $0 returns. Neither the trial court nor the appellate court bought it.
Appellate court: The trial court acted correctly when it excluded this evidence, because the best indicator of what the employee sincerely believed was his own testimony, not testimony from the IRS about how many $0 returns were filed. His 16-month sentence stands.
TAX PROTESTERS NEVER WIN: Sixteen months in federal prison isn’t 16 months at ClubFed. You might want to pull out this case the next time you get a whiff of tax protesting through W-4s. Withholding rule: If you become aware that employees are filing false W-4s, withhold using single/zero status until they provide you with new valid forms. They may haul you into federal court, but you will not be liable to them for doing so.
Last laugh is on you: You can consider a company policy that allows for terminating employees who file false W-4s or who bring frivolous lawsuits against the company.