Copyright © 1998 Robert L. Sommers, all rights reserved.
" The number of illegal tax protesters in the United States as of 1996 was approximately 57,000. This is small compared to the 116,000,000 taxpayers who file returns. The uncollected balance due from illegal tax protesters is approximately $540,000,000. "
- Source: IRS Criminal Investigations Division
Last month’s Hot Topics discussed the wide-spread use of abusive trust arrangements and why those who use them to avoid U.S. income taxes are headed for disaster. But what about the tax protestor crowd that claims the U.S. tax law is illegal? How valid are these arguments and have these protesters had any better luck in court?
The definition of the tax protestor movement, its use of phony legal arguments, and the consequences facing these people in court was succinctly described by the Illinois IRS on its website:
- " The "illegal tax protester movement" is a general term that describes a growing number of groups and individuals who use illegal methods to protest the tax laws. A tax protest scheme is any scheme (without basis in law or fact) with the purpose of expressing dissatisfaction with the tax laws by either interfering with the administration of the laws or attempting to illegally avoid or reduce tax liabilities. Protest schemes take many forms such as claiming improper deductions, credits, or exemptions; not reporting any income; or omitting certain items of income. Protesters might also refuse to pay tax or report income based on a variety of frivolous or discredited legal or constitutional theories.
- The Internet has become a favorite tool for promoters of tax protest schemes. Promoters are very adept at presenting theory as fact. They take information out of context and combine it with their own interpretations of such things as The Magna Carta, Bill of Rights, United States Constitution, and the Declaration of Independence. They also use court cases from before the passage of the 16th Amendment of the Constitution to support theories regarding the constitutionality of the income tax.
- All of these schemes have been considered and rejected many times by the federal courts as frivolous and without merit. In fact, the courts have seen these arguments so often that they no longer feel the need to comment upon them other than to reject them. Penalties, as high as $25,000, have been assessed against protesters for even raising the arguments during litigation."
Implicit with the trust scam promoters (discussed in the May 1998 Hot Topics) is the recognition that U.S. tax laws are valid and apply to taxpayers; otherwise, there would be no need for their trusts. Another segment of the tax scam industry dispenses with the need for fancy trusts by proclaiming you have no legal duty to file tax returns or pay taxes. In other words, our tax system is illegal or unconstitutional.
Many such pages populate the Web, but the leading guru of this group must be Irwin Schiff. Visit his website at http://www.ischiff.com/ and you might be convinced that you don’t have to pay income taxes. Schiff fails to mention that he is a criminally-convicted tax evader and has lost -- big time -- in every court that has heard his meritless theories.
Schiff has been unrelenting and tenacious in presenting his frivolous arguments to the public and to the courts. He has also acted on his beliefs and has suffered the consequences: jail, seizure of assets, penalties and fines, and total and absolute rejection of each and every one of his ideas by the courts.
In U.S. v Schiff, 85-1 USTC ¶9108 , 751 F2d 116, the second circuit court of appeals affirmed Mr. Schiff’s criminal tax evasion jury conviction. Schiff, the court noted, is the author of "How Anyone Can Stop Paying Income Taxes."
On appeal, Schiff, the self-proclaimed leading "untax expert," ditched his argument that the tax system is unconstitutional and contended that he believed, in good faith, he was not required to file tax returns. Implicit in this argument is the recognition that he had an obligation to file tax returns and pay taxes – a 180 degree reversal of what he preaches to the public!
The court, however, did not buy Schiff's post-conviction conversion. It easily distinguished between a good faith misunderstanding of the law and Schiff’s vehement and well-documented disagreement with the law. Those who disagree with the law must still obey it. The court stated the good faith defense as follows:
It is well established that the good faith defense encompasses misunderstanding of the law, not disagreement with the law. United States v. Kraeger, 711 F.2d 6, 7 (2d Cir. 1983). The distinction is necessary to the functioning of the tax system. Without it, any taxpayer could evade tax obligations simply by stubbornly refusing to admit error despite the receipt of any number of authoritative statements of the law. At some point, such stubbornness becomes unreasonable; the line is crossed between misunderstanding and disagreement and the taxpayer can no longer successfully assert a defense of good faith.
Undeterred by his stint in the slammer, Schiff went back to court. U.S. v Schiff, 89-2 USTC Para 9465, 876 F2d 272 (Sec. Circuit, 1989). This time, he argued that his criminal probation requirement that he file tax returns violated his 5th Amendment rights against self-incrimination. Once again, he lost. The court noted that his argument was a rehash of his basic thesis: he does not have to pay taxes. The court made it clear that Schiff was required to file returns and pay taxes on the income he earned under IRC Sec. 6001, 6151 and 6012. The court dismissed Schiff’s notion that the U.S. tax system is voluntary and no income tax is "legally required."
To the extent that income taxes are said to be "voluntary," however, they are only voluntary in that one files the returns and pays the taxes without the IRS first telling each individual the amount due and then forcing payment of that amount. The payment of income taxes is not optional, [citations omitted] however, and the average citizen knows that the payment of income taxes is legally required.
Shrugging off these defeats, Schiff ventured into court once again. Schiff vs. U.S. 73 AFTR 2d Par 94-517 (U.S. Dist. Ct. 1989). This time in a civil case in which he was hit with civil fraud penalties, he claimed that the IRS could not assess taxes against him. The tax system is unconstitutional; and he sincerely believed that he was not required to pay tax. Predictably, he lost again on all counts. The court made the following findings and conclusions:
1. Schiff failed to file an accurate tax return, so his voluntary assessment was zero. Once the IRS filed a zero assessment tax return for the taxpayer, the IRS could then assess a deficiency (an additional amount of tax) against Mr. Schiff.
2. Schiff was given the right to contest the deficiency in Tax Court, which he failed to do.
3. The U.S. tax laws are constitutional. With respect to this argument, the court made the following succinct observation:
The authority given to Congress to lay and collect taxes, see U.S. Const. Art. Section 8, Cl 1, as modified by the 16th Amendment, allows the imposition of an income tax without limitation. The 16th Amendment removed the limitation on Congress’s authority to impose a direct tax only if proportioned among the States, stating the "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." Courts have repeatedly upheld the constitutionality of the 16th Amendment. See, e.g. Brushaber v Union Pacific Railroad, 240 U.S. 1, 17-19 (1916) [The Court upheld the validity of the 16th Amendment, finding that it eliminated the requirement that direct taxes, such as the income tax, on all income from whatever source derived, need no longer be apportioned.
4. Regarding the civil fraud penalty, the court found that Schiff paid no taxes and failed to properly file tax returns. In refuting his claim that he sincerely believed he did not have to pay taxes, the court found that Schiff was an intelligent person with a broad knowledge of tax law, inasmuch as he has written books on the subject and has appeared on television discussing the issue. The court made the following crucial distinction:
The court finds plaintiff's attempts to exculpate himself from the fraud penalty based on the sincerity of his belief that he need not pay income taxes to be without merit. While a failure to pay because of a "misunderstanding of law" may not sustain the imposition of the fraud penalty, "disagreement with the law" provides no defense United States v. Schiff, 801 F.2d 108, 112 (2d Cir. 1986). As the Court of Appeals for the Second Circuit noted, "[t]he distinction [between a misunderstanding and a disagreement] is necessary to the functioning of our tax system. Without it, any taxpayer could evade tax obligations simply by stubbornly refusing to admit error despite the receipt of any number of authoritative statements of the law." Id.
In a prior action involving plaintiff's liability for tax evasion and fraudulent underpayment of taxes, the Tax Court, after reviewing the evidence and considering plaintiff's arguments, concluded:
Petitioner is free to argue his theories to Congress, but he cannot disregard the laws passed by Congress and upheld by the courts, fail to perform an affirmative duty imposed on him by those laws, and then expect to avoid the consequences of his avowedly freely exercised disobedience.
Schiff, T.C. Memo. 1984-223.
In Schiff v CM, T.C. Memo. 1992-183, Mr. Schiff (called "petitioner" in the court decision) once again challenged the U.S. tax system, and the court rejected his frivolous arguments:
According to petitioner, no deficiency can exist, and, therefore, no valid notice of deficiency can be issued without and until a valid assessment has been made. Petitioner's basic premise is that no valid assessment can be made without a voluntarily filed tax return, which petitioner strenuously asserts is something that he has not done. Petitioner also argues that respondent cannot determine a tax on his income for which Congress has not made him liable; that he had no income within the meaning of the Internal Revenue Code; that respondent seeks to impose a tax not authorized by the taxing clauses of the United States Constitution; that this Court has no jurisdiction over petitioner; and that the Tax Court is not a court anyway.
These are stale and long discredited tax protester arguments that have been proffered to and rejected by this and other courts countless times. See, e.g., Laing v. United States, 423 U.S. 161, 174 (1976); United States v. Sullivan, 274 U.S. 259, 263-264 (1927); Brushaber v. Union Pac. R.R., 240 U.S. 1, 19-20 (1916); Planned Investments, Inc. v. United States, 881 F.2d 340, 343-344 (6th Cir. 1989); Roat v. Commissioner, 847 F.2d 1379, 1381 (9th Cir. 1988); Ficalora v. Commissioner, 751 F.2d 85, 87 (2d Cir. 1984), affg. an unreported order of this Court; Woods v. Commissioner, 91 T.C. 88, 90 (1988); Abrams v. Commissioner, 82 T.C. 403 (1984); Rowlee v. Commissioner, 80 T.C. 1111 (1983); McCoy v. Commissioner, 76 T.C. 1027, 1029-1030 (1981), affd. 696 F.2d 1234 (9th Cir. 1983). Moreover, petitioner has previously raised these same arguments in this Court, had them addressed and dismissed as groundless. Schiff v. Commissioner, T.C. Memo. 1984-223. We will not countenance those who would continue to waste judicial resources by engaging in a detailed scholarly refutation of petitioner's specious claims. McCoy v. Commissioner, supra at 1029. Suffice it to say that they are totally unfounded and without merit. We hold that petitioner had unreported gross income in the amount of $141,952 and taxable income in the amount of $96,042 in 1979.
Mr. Schiff’s repeated and unsuccessful attempts to challenge the viability of the U.S. tax system demonstrate the futility of the tax protestor movement. The position of the courts regarding the tax protester movement can be summarized as follows:
1. The tax law is constitutional and Congress has the right to impose income taxes without limitation. Brushaber v Union Pacific Railroad, 240 U.S. 1, 17-19 (1916).
2. The payment of income taxes is not optional, and the average citizen knows that the payment of income taxes is legally required.
3. While a failure to pay because of a "misunderstanding of law" may not sustain the imposition of the fraud penalty, "disagreement with the law" provides no defense.
4. While taxpayers are free to argue their theories to Congress, they cannot disregard the laws passed by Congress and upheld by the courts, fail to perform an affirmative duty imposed on them by those laws, and then expect to avoid the consequences of their avowedly freely exercised disobedience. In other words, disobey the law at your own peril.
5. The courts will not give credence or respect to those who would continue to waste judicial resources by engaging in a detailed scholarly refutation of a tax protester’s specious claims. The courts have repeatedly stated that these arguments are totally unfounded and without merit.
Why spend so much time writing about something as obviously fraudulent as trust scams and tax protester arguments? Because many citizens have no source of information to counter the arguments they hear in favor of these schemes. The average citizen with access to the Web can log on to these tax sites and receive a mountain of misinformation without hearing an opposing view.
While it is easy for tax attorneys and other tax professionals to dismiss the arguments made by the trust scam promoters and tax protestors as the work of a lunatic fringe, the harm they cause is real and it is increasing geometrically, thanks in large part to the Internet and the inactivity of the IRS and state authorities.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**