Now that we are a little over a month away from Tax Day and that awful black hole is opening up in Washington again, thoughts are turning to the greatest question an American taxpayer can ask: “How can I keep the tax man from picking me clean?” In a previous post, we discussed the legal way to handle your deductions. Now we’ll go over some of the other ways folks try to avoid being sucked in and crushed to a financial singularity. Understand this: These tactics will not save you and the least you will get for your trouble is a hefty fine.
According to our friends at H&R Block, these are some of the more common frivolous arguments that the IRS and the Federal Tax Courts look down upon. Each relies on misinterpretations, to put it politely, of the Constitution, the Tax Code or both.
Filing a tax return is voluntary . Wrong. Filing a tax return is not optional for those who meet the law’s requirements. The word “voluntary,” as used in IRS publications, refers to the fact that the U.S. tax system is a voluntary compliance system, which means that taxpayers themselves determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them. For those who do not comply with their tax obligations, the tax law authorizes various compliance measures. When it comes to the Feds and their money, nothing is voluntary. You should know that by now.
Only federal employees and persons living in Washington, D.C., are subject to federal income tax . This one seems to come from the idea that only those living in Federally controlled areas are subject to income tax. It’s a nice argument from the State’s Rights perspective but the idea of the sovereign rights of the states was put to rest during that little dust-up we had between 1862 and 1865.
Native Americans can avoid federal income tax because of a "Native American Treaty." As with the first entry in this list, that is just flat wrong. There have been a multitude of treaties between Native Americans and the Government, some of which have actually been honored and upheld. However, Native Americans are citizens of the United States and, like all citizens, are required to pay their taxes.
Taxpayers can validate invalid returns or other invalid tax positions or documents by writing or stamping the phrase "nunc pro tunc" on the face of the return. The logic here is that the taxpayer wants the defective documents to stand for the proper ones they should have filed. This doesn’t work so just do it right in the first place. According to West’s Encyclopedia of American Law, 2nd Edition, it is the courts that take an action nunc pro tunc, which means “now for then” in order to correct errors or omissions retroactively, thus achieving the results intended by the court at the earlier time.
Income and expenses can be attributed to a purported trust to avoid federal income tax liability. True, trusts are a kind of contract and interference with contracts is prohibited by the U.S. Constitution. However, the payment of taxes in this case is not considered to be interference since trusts fall under the definition of a “person” (see below).
Taxpayers are not required to file an income tax return because of the Paperwork Reduction Act of 1980. Sorry, no. If this was the case, you would not see great piles of tax forms and tedious, difficult to read instruction booklets at every post office. The Paperwork Reduction Act of 1980 didn’t eliminate paperwork, it simply reduced the amount of it (thank you, Mr. Reagan) leading to simpler, easier to work with forms.
The Section 861 Position. The argument here is that taxes are only owed on foreign income under tax code Sections 861 through 865. According to the IRS, the rules of sections 861 through 865 have significance solely in determining whether income is considered from sources within the United States or without the United States, which is relevant, for example, in determining whether a U.S. citizen or resident may claim a credit for foreign taxes paid. That’s it and if anyone tries to sell you on a tax avoidance scheme that looks like this run, t hese are scams and they can lead to fines of many thousands of dollars and some solid jail time.
Claim of Right Argument . Under this frivolous notion, taxpayers claim have basis in their labor equal to the fair market value of their wages, and therefore have no taxable gain. Good try but wrong. There is no “claim of right” doctrine under any federal law, including the Internal Revenue Code, that permits a taxpayer to deduct or exclude the value of his labor. It doesn’t exist any more than the mythical “Republic of Indiana.”
Persons and Citizens . Here is how this works: Taxpayers who reside in the U.S. are not citizens or persons within the meaning of the tax code. This is one of the more bizarre arguments out there and the courts have uniformly rejected it. Section 7701(a)(1) of the Tax Code clearly defines “person” to include an individual, trust, estate, partnership, or corporation. To be a citizen, you have to be born within the confines of the United States or you must have been naturalized.
The Section 911 Position . Here we have U.S. residents trying to exclude taxable income under Tax Code Section 911 by claiming that they are, in fact, residents of a foreign country. They argue that the state, commonwealth, or territory of the United States where they live is a foreign country under Section 911. This will land you in the dock as fast as the Section 861 scam and it is just as stupid. Any 5-year old (OK, my 5-year old) can tell you that all the states, commonwealths and territories are, in fact, part of the United States. Again this can lead to big fines and jail time.
Trafficking in Child Credits. This scheme has taxpayers believing that they can buy or sell the right to claim a child for purposes of the Earned Income Credit. No, you can’t, and frankly the whole idea is rather creepy. To be claimed as a dependant, a child must qualify under the Earned Income Credit rules.
Home Business Deductions . Some taxpayers think that they can deduct all of their nonbusiness-related household expenses if they establish home businesses. Assuming that you haven’t read anything about the tax implications of working out of your home, that might be a reasonable mistake. Of course, reasonable mistakes are punished just as vigorously as unreasonable ones so why not do it right? You can make deductions on that portion of your home used for business. Look at Deductibility: Taxes and Your Small Business for more information.
Employer withholding of employment taxes is voluntary . It’s no more voluntary than filing your returns. According to the IRS, employers are required by law to withhold income and employment taxes from salary and wages paid to employees. Employers also must deposit the amounts withheld with the IRS.
Failure to pay on moral grounds. The foundation of this one is the erroneous belief that the 9th Amendment exempts those with religious or other objections to military spending from paying taxes to the extent the taxes will be used for military spending. Your moral beliefs may do you credit and make you popular at church socials, but religious or philosophical pacifism is not recognized under the U.S. Tax Code. In fact, there is no law that permits you to evade your tax obligations simply because you don’t like what the Government will do with the money.
The human mind is nothing if not inventive. There are more such arguments on the IRS web site but they are nothing more than a dodge and if you buy into them, you become a criminal. Just remember, whether you like it or not, regardless of your belief that Texas is an independent republic or that you are somehow not a person (what are you, a coffee table?) nothing you say or do will excuse you from paying your taxes. Get the straight story on your taxes from experts in the field that have your best interests in mind and some great deals this time of year such as the $10.00 off TaxCut Home & Business software and a 25% discount on your TaxCut Online federal return from H&R Block.