A Look at The Top 18 Tax Myths
Most US taxpayers understand that the federal tax code is extremely complex. There are a whole host of interpretations regarding various provisions. And there are myths concerning filing of taxes that, when believed, can lead taxpayers into trouble with tax authorities.
1. “Only Individuals in Higher Income Tax Brackets Face a Tax Audit.”
Though those with six-figure incomes are a larger target for the IRS, those claiming the earned income tax credit with income under $25,000 also face frequent audits.
It is also a huge mistake to not report cash income because of the belief you are leaving no paper trail. The IRS can look at expense reports in seeing how much you spent as compared to money you claim on your returns. The agency can also look at accounts and deposits in determining whether what reporting is accurate. In today’s world, the IRS can also look at e-commerce and internet activities.
One commentator suggests that we may see additional audits due to automation of functions. Such automation allows for tax authorities to identify unreported income.
There are many types of tax fraud, most of them involving intentional failure to disclose income, inflating legal deductions, reporting personal expenses as business expenses, concealing assets, and mislabeling transactions. While these raise hackles among respectable tax professionals, its the more outrageous attempts at tax evasion that make the IRS’ list of most frivolous interpretations of tax law. Here they are, in no particular order:
2. “Filing Tax Returns and Paying Taxes Is Voluntary”
Despite legal precedent defining “voluntary” as the taxpayer’s responsibility—rather than the government’s—to estimate their tax liabilities and calculate their returns, some people cling to the definition as absolving them from the responsibility altogether. Case law judgments consistently support taxation’s compulsory status as outlined in the Sixteenth Amendment.
3. “Taxation Is Akin to Slavery”
“If paying taxes is compulsory, then it violates the 13th Amendment.” When we crunch the numbers, we often jokingly refer to segments of the calendar year as “working for the man”—the portion of our salaries that equal our tax liabilities. Some people take this mindset too literally, claiming that taxation is a form of involuntary servitude and therefore illegal and unconstitutional.
This argument is on par with persons claiming robbery or arson is as serious a crime as murder, as it robs the victim not only of their property but the time they spent earning the money that allowed them to purchase it. Neither argument holds water in a court of law.
4. “Wages, Tips, and Compensation for Personal Services Is Not Taxable”
Some people claim that there are no financial gains when an individual exchanges their time and labor at fair market value. According to the IRS, another theory purports that “wages are not taxable because the Code does not specifically tax ‘time reimbursement transactions.'” and others argue that the Sixteenth Amendment “doesn’t authorize a tax on wages and salaries, but only on gain or profit.”
Regardless of the source, all income except that which is specifically exempted by the tax code is subject to taxation.
5. “Military Retirement Pay Is Exempt From Taxation”
As much as many Americans might support this argument, it’s not true. Still, military veterans occasionally claim they have no obligation to pay taxes on their pensions. One man earned a $25,000 levy after a relentless pursuit of “justice” but most who fail to pay the correct taxes on their military benefits are legitimately confused by tax law.
Some veterans, because their states don’t tax their retirement income, don’t realize they have to pay income taxes to the IRS. The fact that VA disability payments are also exempt at the federal level may further confuse the issue.
6. “The IRS Must File a Return on My Behalf If I Fail to Do So”
Some point to section 6020(b) of the tax code negates the government’s right to impose penalties and legal action against those who fail to file their tax returns. Section 6020(b) does not obligate the Federal government to bear the responsibility of filing that individual’s return. Its purpose is to provide an instrument for the IRS to calculate what the taxpayer owes.
If you are unable to file a return on time, a tax professional can help. You can easily file an extension on your own if you need time to organize your documents, though you’re still required to pay estimated taxes for that period.
7. “The IRS Is Not a Legitimate United States Agency”
The IRS came into existence in 1862 as the Commissioner of Internal Revenue, created to support the North’s efforts in the Civil War for the duration of the conflict. In 1864, It “sunset” ten years later reemerging as the IRS on February 3, 1913, upon the ratification of the 16th Amendment. “The Congress shall have 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.”
Fans of actor Wesley Snipes may remember when in 2008, he got into legal hot water for tax evasion. This was just one of his excuses for not paying taxes on his $40m/annual income. He lost, though only convicted on misdemeanor charges for failing to file his returns. Still, he served all three years of the maximum sentence for his transgressions between 2010 and 2013.
8. “The IRS Can Only Tax Income From Foreign Sources”
All income generated by U.S. citizens and residents is subject to income tax collection, regardless of the income’s source. Intentionally or not, objectors misinterpret sections 861 and 911 when attempting to support their arguments.
A similar yet convoluted version of this argument designates income generated within the U.S. as foreign income, and piggyback this assertion on claims that the tax evader is exempt from paying taxes on foreign income. There is no precedent for either of these arguments prevailing in the past, and it’s all but guaranteed they would be thrown out in the future.
9. “The First Amendment Protects Me If I Object on Religious or Moral Grounds”
Nolo’s Plain English Law Dictionary (as cited by Cornell Law School) says, “refusing to answer a draft call is a federal felony, but when a person’s religious beliefs are long-standing and consistent (as with the Quakers) then the objection to service is excused.”
Some people apply the conscientious objection principle to paying taxes.
- “My faith does not allow me to take up arms, and I do not wish any portion of my taxes to support armed conflicts”.
- “I refuse to fund medical services that perform procedures to which I am strongly opposed”
- “Taxation violates my constitutional rights, and it’s my moral right to invoke the First Amendment in protest”
Consider the conscientious objector argument as legitimate as tearing up your draft card, no matter what your interpretation of the First Amendment or Religious Freedom Restoration Act.
10. “The IRS Violates the Fifth Amendment”
The Fifth Amendment prohibits against the taking of property without compensation or due process of law. The key phrase here is “due process of law”, which case law has repeatedly determined the IRS satisfies through the refund process. Taxpayers also reserve the right to petition the U.S. Tax Court to challenge discrepancies between payer-generated returns and IRS assessments.
11. “I Plead the Fifth! Tax Returns Are Self-Incrimination”
Case law judgments refute the claim that requests for information, such as questions on IRS forms, do not present “hazards of self-incrimination” (Rader v. Commissioner, 2014). While this argument may be an interesting subject for philosophical debate and is a relatively reasonable test of the tax code language, legal precedent and the expenses of bringing the argument in front of a judge (and the steep penalties resulting from a conviction) make it an ill-advised strategy.
12. “The IRS violates the Reduced Paperwork Act”
The Reduced Paperwork Act “generally provides that every federal agency must obtain approval from the Office of Management and Budget (OMB) before using identical questions to collect information from 10 or more persons.” The IRS adds this commentary to the PRA: The “public protection” provision of the PRA provides that no person shall be subject to any penalty for failing to maintain or provide information to any agency if the information collection request involved does not display a current control number assigned by the Office of Management and Budget [OMB] Director.” Those who point to the PRA as part of their arguments claim that instructions for Form 1040 lack a required OMB control number.
Courts have rejected these arguments based on the following:
- The actual 1040 form bears an OMB control number, and the PRA does not apply to instruction books
- It wasn’t Congress’ intent to undermine the taxpayer’s obligation to file tax returns or pay federal taxes.
This one begs the question, “why would anyone who’s concerned about paperwork waste the court’s time with frivolous tax-evasion shenanigans?”
13. “The Sixteenth Amendment Was Never Ratified”
“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.” Congress passed the Sixteenth Amendment on July 2, 1909, and it was ratified on February 3, 1913. Learn more about the Amendment’s history here.
14. “I Am Not a U.S. Citizen, and Therefore I Do Not Have to Comply”
Tax evaders have used various interpretations of personhood and citizenship to invalidate tax laws. One of the arguments that have gained attention in the media in recent years relates to people who refer to themselves as “sovereign citizens” subject only to local and state laws if any federal legislation. Also known as Fourteenth Amendment citizens, common law citizens, or freemen, members of the sovereign citizen movement tend to clog the courts with “paper terrorism,” filing groundless lawsuits and employing frivolous tax evasion arguments as a form of protest.
In the 2014 case Waltner v. Commissioner, “the court dismissed the possibility of being a citizen of a state but not the United States as ‘nonsensical’ and ‘backwards; one cannot be a citizen of a State without also being a citizen of the United States. Indeed, citizenship in the United States is ‘paramount and dominant’ over State citizenship.” — “The Truth about Frivolous Tax Arguments”, Internal Revenue Service
15. “The United States of America Includes Only Federal Enclaves”
It’s a stretch to claim none of the United States are, in fact, part of the United States, but this is another popular evasive justification for “sovereign citizens”. According to them, the IRS’s jurisdiction is limited to military bases, reservations, Federal territories, and the District of Columbia.
Despite reaching Federal courts no fewer than a dozen times, this argument has understandably failed to get anyone off the hook.
16. “Any Correspondence Addressed to Private Citizens in All Capital Letters Is Invalid”
This one isn’t common, but it’s among the most creative. State law typically spells business names with capital letters. If the IRS mistakenly capitalizes an individual or private, informal organization’s name, according to some, that correspondence (and any failure on the part of the addressee to comply with its instructions) is invalid since private citizens are not “fictional legal entities”.
In 2010, the defendant in Holmes v. Commissioner argued the “capital defense”, but ended up paying a $10,000 penalty for his “frivolous and groundless” claims.
17. “Federal Taxes Only Apply to Federal Employees”
This argument focuses on this excerpt from Section 3401(c), defining taxable employees: “‘…employee’ includes ‘an officer,employee, or elected official of the United States’. In this instance of frivolous evasion, the meaning of “includes” is badly distorted to the point at which objectors claim only the named professions are subject to taxation, and all wages earned from public sector positions are exempt. Sensible (and legally supported) interpretations, not to mention grammar, support the IRS’s insistence that “includes” means “not limited to”. Case law has proven its point by enforcing penalties, including costs to prosecute evaders using this argument.
18. “Only the Little People Pay Taxes”
This famous quote, attributed to real estate tycoon Leona Helmsley wasn’t her official excuse for her numerous tax evasion schemes, but it was an attitude that took down her empire. Similar claims such as “the law doesn’t apply to me,” or “I can outsmart the IRS” have failed to impress jurors in tax court.
Avoid Paying Unnecessary Taxes & Clear Up Any Questions By Speaking With a Tax Attorney
There’s a big difference between tax evasion and tax avoidance. The latter ethically takes advantage of tax exemptions, deductions, deferral plans, credits, shelters, and legal loopholes to reduce tax liabilities. Tax evasion includes falsifying income or expenses, not reporting income, and attempting to justify a refusal to comply with tax law based on frivolous arguments such as those described above.
If you do feel you have been treated unfairly by the IRS, talk to an experienced tax professional before you try to handle the matter yourself. Be prepared to file your returns and make your required payments before pursuing an objection to insulate yourself from penalties and legal action. Regardless of your desire to act on your principles and protect your assets, your main objective is saving money. Call a tax professional first, and save yourself the cost of a tax lawyer or criminal attorney down the line.