IRS debunks tax myths
The agency doesn't look kindly on the "taxes are voluntary" and other frivolous arguments against paying.
Now that we're well into another tax-filing season, the Internal Revenue Service is engaging in one of its annual rituals -- debunking the numerous, creative arguments citizens give as a reason they don't have to file a tax return.
With the rise of the Internet, these tax myths have gained new currency as they spread with lightning speed around the Web. The IRS says they are all bogus and that anyone who relies on them will end up in trouble.
For example, one argument claims that the law describes the tax system as "voluntary," and therefore no one really has to pay taxes. Proponents point to the fact that the IRS itself tells taxpayers in the Form 1040 instruction book that the tax system is voluntary. Also, the Supreme Court's opinion in Flora v. United States, 362 U.S. 145, 176 (1960), is often quoted for the proposition that "our system of taxation is based upon voluntary assessment and payment, not upon distraint."
"The requirement to file an income tax return is not voluntary," the IRS said. And if you owe tax, payment of that is not voluntary either.
Zero return. Believe it or not, the IRS each year receives a few of what it calls "zero returns." The citizen files a return showing zero income and zero tax liability. But the person often attaches a W-2 form, requesting a refund of the tax on income that had been withheld throughout the year.
"There is no authority that permits a taxpayer that has taxable income to avoid income tax by filing a zero return," the agency said. "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."
Some people don't file a return because they claim the IRS is obligated, by law, to prepare a return for individuals who fail to file. Some say Section 6020(b) of the tax code obligates the IRS to prepare and sign under penalties of perjury a federal tax return for a person who does not file a return. Thus, those who subscribe to this contention claim that they are not required to file a return for themselves.
But it doesn't work that way. The agency says Section 6020(b) merely provides the IRS with a mechanism for determining the tax liability of a taxpayer who has failed to file a return. The law allows the IRS to file a return for these individuals, but does not require it to.
Not income? Some argue 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.
But don't expect to get very far with that argument. For federal income tax purposes, "gross income" means all income from whatever source derived and includes compensation for services, the agency said.
Under the tax code, 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.
No jurisdiction? Some individuals argue that they have rejected citizenship in the United States in favor of state citizenship, and 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 U.S. The underlying theme of these arguments is the same: The person is not a U.S. citizen and is not subject to federal tax laws because only U.S. citizens are subject to those laws.
The IRS cites the 14th Amendment to the U.S. Constitution, which states: "All 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."
"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,” the IRS said.
It's clear that playing word games with the tax collection agency probably won't end well. The IRS has issued an 80-page document (.pdf file) listing its growing collection of what it calls "frivolous" tax arguments and the detailed legal grounds that render them baseless.
Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.
Highlighted in this year's document are 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes, and injunctions against preparers and promoters of false fuel tax credit schemes.
"Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document," the IRS said.
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