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Don’t Mess with the IRS

My mail box is filled with tax reporting documents at this time of year. All of my banks, brokers and employers are sending the IRS information on what I earned last year. I’ll have to file a return and report them all, or be subject to criminal and civil sanctions. Is there any way out of this? Some people think so, and have come up with many novel arguments why they don’t have to pay the tax. But, I’m not going to try any of them, and you shouldn’t either. The IRS recently issued a detailed report on the major “Frivolous Tax Arguments” and why they don’t work. You can read the entire 70-page report on the IRS website if you like, but I have summarized a few key sections in this article.

Argument 1.: The Tax System is “Voluntary” so you don’t have to file a return. The tax system is “voluntary” in that it is controlled in the first instance by the taxpayer. We get to “voluntarily” report our income, calculate the appropriate tax, and then pay it. The system does not do it for us, we must file our own 1040 (or other) tax return form, and calculate our own tax bill (subject to audit and revision by the IRS).

The requirement that you file and pay is not really voluntary. Federal law (the Tax Code) Title 26 United States Code, in sections 6011(a) and 6012(a) state that a taxpayer who has received above a certain amount of income is required to file a return and to pay the required tax. Failure to file may subject the individual to fines, imprisonment and civil penalties. The rules start with voluntarily compliance, but the Treasury department has the power to enforce the laws through collection efforts and the Courts.

Argument 2.: Payment of the tax is “Voluntary.” Some say that because payment is voluntary, you don’t have to pay. This is based on a similar misreading of the Tax Code as above. Adherents to this argument won’t pay until the IRS can prove to their satisfaction that they must, but will not listen when the IRS cites the Code. Sections 1 and 6151 of the Tax Code clearly state that you must pay taxes. Despite clear proof, some will never believe what the IRS says (not even when they are dragged out of their homes and hauled off to jail.)

Argument 3.: Wages are not “income” subject to the tax. Some contend that wages are not “income.” This argument sounds pretty plausible. No one just gives you your wages, you exchange your time and effort in order to get them. Like any business, this is your investment and so deductible against your income. If you value your time at exactly what you get paid, then you didn’t make a profit, and so have no income.

Unfortunately, this argument fails too. The Tax Code defines income as all income from whatever source, and includes compensation for services. (Section 61). Any income from whatever source is presumed to be income unless the taxpayer can prove that it is exempt or excluded under some other section of the Tax Code. All wages are “income” subject to the income-tax.

The IRS absolutely hates these frivolous arguments. If you try to use one of them, you risk the full wrath of “the Service.” They seem to enjoy prosecuting these matters and holding up the offenders as examples to others. You may recall the couple in New Hampshire who were recently taken to jail for tax evasion. You may even know that Al Capone, the famous mobster, was convicted, not of murder or any other crime, but tax evasion. Don’t mess with the IRS!