This article was last updated on June 25
Each year the IRS releases its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. It’s called the Truth about Frivolous Tax Arguments and it makes interesting reading thanks to the inclusion of real life cases and situations where people have decided that they do not need to pay their share of federal taxes. Here are some that I found particularly interesting – and really could not believe that some people used these contentions as a way to get out of paying taxes.
Like moths to a flame, some people find themselves irresistibly drawn to the tax protester movement’s illusory claim that there is no legal requirement to pay federal income tax. And, like moths, these people sometimes get burned
Contention #1: Some taxpayers assert that they are not required to file federal tax returns because the filing of a tax return is voluntary. Proponents point to the fact that the IRS itself tells taxpayers in the Form 1040 instruction book that the tax system is voluntary.
Fact: The word “voluntary,” as used in IRS publications, refers to the system of allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset. The requirement to file an income tax return is not voluntary and is clearly set forth in IRS tax laws/provisions.
Contention #2: Taxpayers can reduce their federal income tax liability by filing a “zero return.” Some taxpayers are attempting to reduce their federal income tax liability by filing a tax return that reports no income and no tax liability (a “zero return”) even though they have taxable income. Many of these taxpayers also request a refund of any taxes withheld by an employer. These individuals typically attach to the zero return a Form W-2, or another information return that reports income and income tax withholding, and rely on one or more of the frivolous tax avoidance arguments to support their position.
Fact: There is no authority that permits a taxpayer that has taxable income to avoid income tax by filing a zero return. Section 61 provides that gross income includes all income from whatever source derived, including compensation for services. Courts have repeatedly penalized taxpayers for making the frivolous argument that the filing of a zero return can allow a taxpayer to avoid income tax liability or permit a refund of tax withheld by an employer.
Contention #3: Wages, tips, and other 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 not 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. Another similar argument asserts that wages are not subject to taxation where a person has obtained funds in exchange for their time. Under this theory, wages are not taxable because the Code does not specifically tax these so-called “time reimbursement transactions.” Some take a different approach and argue that the Sixteenth Amendment to the United States Constitution did not authorize a tax on wages and salaries, but only on gain or profit
Fact: For federal income tax purposes, “gross income” means all income from whatever source derived and includes compensation for services. 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
Contention #4: Taxpayer is not a “citizen” of the United States, thus not subject to the 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 laws.
Fact: The Fourteenth Amendment to the United States Constitution defines the basis for United States citizenship, stating that “all persons born or naturalized in the United States, and subject to the jurisdiction 22 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.
Contention #5: The only “employees” subject to federal income tax are employees of the federal government. Some argue that the federal government can tax only employees of the federal government; therefore, employees in the private sector are immune from federal income tax liability. This argument is based on a misinterpretation of section 3401, which imposes responsibilities to withhold tax from “wages.” That section establishes the general rule that “wages” include all remuneration for services performed by an employee for his employer.
Fact: Section 3401(c) of the tax code defines “employee” and states that the term “includes an officer, employee or elected official of the United States . . . .” This language does not address how other employees’ wages are subject to withholding or taxation. Section 7701(c) states that the use of the word “includes” “shall not be deemed to exclude other things otherwise within the meaning of the term defined.” Thus, the word “includes” as used in the definition of “employee” is a term of enlargement, not of limitation. It clearly makes federal employees and officials a part of the definition of “employee,” which generally includes private citizens. The Internal Revenue Service issued Revenue Ruling 2006-18, 2006-1 C.B. 743, warning taxpayers of the consequences of making this frivolous argument.
Contention #6: Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment. Some argue that taxpayers may refuse to pay federal income taxes based on their religious or moral beliefs, or objection to the use of taxes to fund certain government programs. Some taxpayers have also argued that they do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment
Fact: The First Amendment to the United States Constitution provides that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.” The First Amendment, however, does not provide a right to refuse to pay income taxes on religious or moral grounds, or because taxes are used to fund government programs opposed by the taxpayer. Nor does the First Amendment protect commercial speech or speech that aids or incites taxpayers to unlawfully refuse to pay federal income taxes, including speech that promotes abusive tax avoidance schemes. Similarly, 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.
Contention #7: The Internal Revenue Service is not an agency of the United States. Some argue that the IRS is not an agency of the United States but rather a private corporation, because it was not created by positive law (i.e., an act of Congress) and that, therefore, the IRS does not have the authority to enforce the Internal Revenue Code.
Fact: There is a host of constitutional and statutory authority establishing that the IRS is an agency of the United States. Pursuant to section 7801, the Secretary of the Treasury has full authority to administer and enforce the internal revenue laws and has the power to create an agency to enforce such laws. Based upon this legislative grant, the IRS was created. Thus, the IRS is a body established by “positive law” because it was created through a congressionally mandated power. Moreover, section 7803(a) explicitly provides that there shall be a Commissioner of Internal Revenue who shall administer and supervise the execution and application of the internal revenue laws.
Contention #8: Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime. Proponents of this contention encourage individuals to file claims for refund of the Social Security taxes paid during their lifetime, on the basis that the claimants have sought to waive all rights to their Social Security benefits. Additionally, some advise taxpayers to claim a charitable contribution deduction as a result of their “gift” of these benefits or of the Social Security taxes to the United States.
Fact: There is no provision in the Internal Revenue Code, or any other provision of law, which allows for a refund of Social Security taxes paid on the grounds asserted above.
Contention #9: A notice of federal tax lien is invalid because it is unsigned or not signed by the Secretary of the Treasury, or because it was filed by someone without delegated authority.
Fact: The form and content of the notice of federal tax lien is controlled by federal law. Section 6323(f)(3) provides that the form and content of the notice of federal tax lien shall be prescribed by the Secretary and shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien. There is no requirement in the statute or regulation that the notice of federal tax lien must be signed when filed.
Contention #10: The Tax Court does not have the authority to decide legal issues.
Fact: The United States Tax Court is a federal court of record established by Congress under Article I of the United States Constitution. Congress created the Tax Court to provide a judicial forum in which affected persons could dispute tax deficiencies prior to payment of the disputed amount. The jurisdiction of the Tax Court includes the authority to hear tax disputes concerning notices of deficiency, notices of transferee liability, certain types of declaratory judgment, readjustment and adjustment of partnership items, review of the failure to abate interest, administrative costs, worker classification, relief from joint and severable liability on a joint return, and review of collection due process actions.
Before you contemplate arguing against paying your fair share of taxes, read the 80-page document available at IRS.gov. Further, congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000.