Igor Drabkin, Esq.
Tax time - people claiming they know a legal
way not to pay taxes
As the tax season approaches, more and more people
are starting to think about preparing their federal and state tax
returns. For many, especially the self-employed, this is a difficult
time because they realize that they owe the Government unpaid taxes.
This is also the season for scam artists who offer (usually for
a fee) to show you a "legal system" through which you
don't have to pay taxes. Although the idea sounds preposterous,
millions of Americans have bought into it, based on frivolous legal
arguments (which may sound legitimate to the layperson) marketed
for profit by tax evaders.
The Truth About Frivolous Tax
This article summarizes some of the more
common frivolous “legal” arguments made by individuals who oppose
compliance with the federal tax laws.
|Argument 1: The Federal Income Tax system is voluntary in nature
Some assert that they are not required to file
federal tax returns because the filing of a tax return is voluntary.
In a similar argument, some contend that they are not required to
pay federal taxes because the payment of federal taxes is voluntary.
Proponents of this position argue that our system of taxation is
based upon voluntary assessment and payment.
The word “voluntary,” as used in Flora v. United States, 362 U.S.
145, 176 (1960) and in IRS publications, simply refers to our system
of allowing taxpayers to determine the correct amount of tax and
complete the appropriate returns, rather than have the government
determine tax for them. The requirement to file an income tax return
is not voluntary and is clearly set forth in Internal Revenue Code
§§ 6011(a), 6012(a), et seq., and 6072(a). See also Treas. Reg.
Any taxpayer who has received more than a statutorily determined
amount of gross income is obligated to file a return. Failure to
file a tax return could subject the noncomplying individual to criminal
penalties, including fines and imprisonment, as well as civil penalties.
In United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986),
the court clearly states, “although Treasury regulations establish
voluntary compliance as the general method of income tax collection,
Congress gave the Secretary of the Treasury the power to enforce
the income tax laws through involuntary collection. ... The IRS
efforts to obtain compliance with the tax laws are entirely proper.”
The requirement to pay taxes is not voluntary and is clearly set
forth in section 1 of the Internal Revenue Code, which imposes a
tax on the taxable income of individuals, estates, and trusts as
determined by the tables set forth in that section. (Section 11
imposes a tax on the taxable income of corporations.) Furthermore,
the obligation to pay tax is described in section 6151, which requires
taxpayers to submit payment with their tax returns. Failure to pay
taxes could subject the noncomplying individual to criminal penalties,
including fines and imprisonment, as well as civil penalties.
|Argument 2: Wages and Compensation
received for personal services are not Income
This argument asserts that wages, tips, and
other compensation received for personal services are not income,
because there is allegedly no taxable gain when a person “exchanges”
labor for money. Under this theory, wages are not taxable income
because people have basis in their labor equal to the fair market
value of the wages they receive; thus, there is no gain to be taxed.
For federal income tax purposes, “gross income” means all income
from whatever source derived and includes compensation for services.
I.R.C. § 61. Any income, from whatever source, is presumed to be
income under section 61, unless the taxpayer can establish that
it is specifically exempted or excluded. In Reese v. United States,
24 F.3d 228, 231 (Fed. Cir. 1994), the court stated, “an abiding
principle of federal tax law is that, absent an enumerated exception,
gross income means all income from whatever source derived.”
All compensation for personal services, no matter what the form
of payment, must be included in gross income. This includes salary
or wages paid in cash, as well as the value of property and other
economic benefits received because of services performed, or to
be performed in the future. Furthermore, criminal and civil penalties
have been imposed against individuals relying upon this frivolous
Some maintain that there is no federal statute imposing a tax on
income derived from sources within the United States by citizens
or residents of the United States. They argue instead that federal
income taxes are excise taxes imposed only on nonresident aliens
and foreign corporations for the privilege of receiving income from
sources within the United States. The premise for this argument
is a misreading of sections 861, et seq., and 911, et seq., as well
as the regulations under those sections.
As stated above, for federal income tax purposes, “gross income”
means all income from whatever source derived and includes compensation
for services. I.R.C. § 61. Further, Treasury Regulation § 1.1-1(b)
provides, “[i]n general, all citizens of the United States, wherever
resident, and all resident alien individuals are liable to the income
taxes imposed by the Code whether the income is received from sources
within or without the United States.” Further, these frivolous assertions
are clearly contrary to well-established legal precedent. See Williams
v. Commissioner, 114 T.C. 136, 138 (2000); Aiello v. Commissioner,
T.C. Memo. 1995-40; Madge v. Commissioner, T.C. Memo. 2000-370.
|Argument 3: The Taxpayer is not a Citizen
of the U.S. and is not subject to Federal Income Tax laws
Some individuals argue that they have rejected
citizenship in the United States in favor of state citizenship;
therefore, they are relieved of their federal income tax obligations.
A variation of this argument is that a person is a free born citizen
of a particular state and thus was never a citizen of the United
States. The underlying theme of these arguments is the same: the
person is not a United States citizen and is not subject to federal
tax laws because only United States citizens are subject to these
The Fourteenth Amendment to the United States Constitution defines
the basis for United States citizenship, stating that “[a]ll persons
born or naturalized in the United States, and subject to the jurisdiction
thereof, are citizens of the United States and of the State wherein
they reside.” The Fourteenth Amendment therefore establishes simultaneous
state and federal citizenship. Claims that individuals are not citizens
of the United States but are solely citizens of a sovereign state
and not subject to federal taxation have been uniformly rejected
by the courts. See O'Driscoll v. I.R.S., 1991 U.S. Dist. LEXIS 9829
(E.D. Pa. 1991); United States v. Sloan, 939 F.2d 499, 500 (7 th
Cir. 1991), cert. denied, 502 U.S. 1060, reh´g denied, 503 U.S.
953 (1992); United States v. Ward, 833 F.2d 1538, 1539 (11 th Cir.
1987), cert. denied, 485 U.S. 1022 (1988); United States v. Sileven,
985 F.2d 962 (8 th Cir. 1993).
|Argument 4: Federal Income Tax
violates the Constitution
Some assert that the collection of federal income
taxes constitutes a “taking” of property without due process of
law, in violation of the Fifth Amendment. Thus, any attempt by the
Internal Revenue Service to collect federal income taxes owed by
a taxpayer is unconstitutional.
The Fifth Amendment to the United States Constitution provides that
a person shall not be “deprived of life, liberty, or property, without
due process of law ...” The U.S. Supreme Court stated in Brushaber
v. Union Pacific R.R., 240 U.S. 1, 24 (1916), that “it is ... well
settled that [the Fifth Amendment] is not a limitation upon the
taxing power conferred upon Congress by the Constitution; in other
words, that the Constitution does not conflict with itself by conferring
upon the one hand a taxing power, and taking the same power away
on the other by limitations of the due process clause.” Further,
the Supreme Court has upheld the constitutionality of the summary
administrative procedures contained in the Internal Revenue Code
against due process challenges, on the basis that a post-collection
remedy (e.g., a tax refund suit) exists and is sufficient to satisfy
the requirements of constitutional due process. Phillips v. Commissioner,
283 U.S. 589, 595-97 (1931).
The Internal Revenue Code provides methods to ensure due process
to taxpayers: (1) the “refund method,” set forth in section 7422(e)
and 28 U.S.C. §§ 1341 and 1346(a), where a taxpayer must pay the
full amount of the tax and then sue in a federal district court
or in the United States Court of Federal Claims for a refund; and
(2) the “deficiency method,” set forth in section 6213(a), where
a taxpayer may, without paying the contested tax, petition the United
States Tax Court to redetermine a tax deficiency asserted by the
IRS. Courts have found that both methods provide constitutional
Some argue that taxpayers may refuse to file federal income tax
returns, or may submit tax returns on which they refuse to provide
any financial information, because they believe that their Fifth
Amendment privilege against self-incrimination will be violated.
There is no constitutional right to refuse to file an income tax
return on the ground that it violates the Fifth Amendment privilege
against self-incrimination. In United States v. Sullivan, 274 U.S.
259, 264 (1927), the U.S. Supreme Court stated that the taxpayer
“could not draw a conjurer´s circle around the whole matter by his
own declaration that to write any word upon the government blank
would bring him into danger of the law.” The failure to comply with
the filing and reporting requirements of the federal tax laws will
not be excused based upon blanket assertions of the constitutional
privilege against compelled self-incrimination under the Fifth Amendment.
Another argument asserts that the compelled compliance with federal
tax laws is a form of servitude in violation of the Thirteenth Amendment.
The Thirteenth Amendment to the United States Constitution prohibits
slavery within the United States, as well as the imposition of involuntary
servitude, except as punishment for a crime of which a person shall
have been duly convicted. In Porth v. Brodrick, 214 F.2d 925, 926
(10 th Cir. 1954), the Court of Appeals stated that “if the requirements
of the tax laws were to be classed as servitude, they would not
be the kind of involuntary servitude referred to in the Thirteenth
Amendment.” Courts have consistently found arguments that taxation
constitutes a form of involuntary servitude to be frivolous.
Another tax protester argument is based on the premise that all
federal income tax laws are unconstitutional because the Sixteenth
Amendment was not officially ratified, or because the State of Ohio
was not properly a state at the time of ratification. This argument
has survived over time because proponents mistakenly believe that
the courts have refused to address this issue.
The Sixteenth Amendment provides that Congress shall have the power
to lay and collect taxes on income, from whatever source derived,
without apportionment among the several states, and without regard
to any census or enumeration. U.S. Const. amend. XVI. The Sixteenth
Amendment was ratified by forty states, including Ohio, and issued
by proclamation in 1913. Shortly thereafter, two other states also
ratified the Amendment. Under Article V of the Constitution, only
three-fourths of the states are needed to ratify an Amendment. There
were enough states ratifying the Sixteenth Amendment even without
Ohio to complete the number needed for ratification. Furthermore,
the U.S. Supreme Court upheld the constitutionality of the income
tax laws enacted subsequent to ratification of the Sixteenth Amendment
in Brushaber v. Union Pacific R.R., 240 U.S. 1 (1916). Since that
time, the courts have consistently upheld the constitutionality
of the federal income tax.
Some assert that the Sixteenth Amendment does not authorize a direct
non-apportioned income tax and thus, U.S. citizens and residents
are not subject to federal income tax laws. The courts have both
implicitly and explicitly recognized that the Sixteenth Amendment
authorizes a non-apportioned direct income tax on United States
citizens and that the federal tax laws as applied are valid. In
United States v. Collins, 920 F.2d 619, 629 (10 th Cir. 1990), cert.
denied, 500 U.S. 920 (1991), the court cited to Brushaber v. Union
Pac. R.R., 240 U.S. 1, 12-19 (1916), and noted that the U.S. Supreme
Court has recognized that the “sixteenth amendment authorizes a
direct nonapportioned tax upon United States citizens throughout
Penalties for Pursuing Frivolous Tax Arguments
Those who act on frivolous positions risk a variety of civil and
criminal penalties. Taxpayers filing returns with frivolous positions
may be subject to the accuracy-related penalty under section 6662
(twenty percent of the underpayment attributable to negligence or
disregard of rules or regulations) or the civil fraud penalty under
section 6663 (seventy-five percent of the underpayment attributable
to fraud). Tax preparers who submit returns maintaining groundless
positions may be subject to penalties in addition to those imposed
on their clients.
Moreover, section 6702 provides for the imposition of a $500 penalty
against any individual who files a frivolous income tax return.
Section 6673 allows the courts to impose a penalty of up to $25,000
when they come to any of three conclusions:
· a taxpayer instituted a proceeding primarily
In addition, to the civil penalties, the
promoters and taxpayers who aggressively pursue these frivolous arguments
may be subject to criminal prosecution under Section 7201 of the Internal
Revenue Code for tax evasion, Section 7203 for willful failure to
file return, as well as conspiracy.
· a position is frivolous or groundless, or
· a taxpayer unreasonably failed to pursue administrative remedies.
This post is for educational and information
purposes only. It is not legal advice on any particular case, and
merely a general opinion of one California lawyer. You should not
rely on it without consulting a competent attorney in your area
about your specific case and facts. It is not intended to, and shall
not, create an attorney-client relationship.
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