NY TIMES:
Saying Income Tax Is Illegal
November 19, 2000
Saying
Income Tax Is Illegal, Business Owners Quit Paying
By DAVID CAY JOHNSTON
LAKE SHASTA, Calif. Al Thompson
squeezed most of his manufacturing company's 28
employees into a conference room here in October to say
he had good news: Income taxes must be paid by only a
few Americans, mostly those working for foreign-owned
companies. So, he told the workers, they would not have
to pay income taxes ever again. His business is exempt,
too, he said.
No Social Security or Medicare taxes,
either. The company was no longer withholding taxes from
their paychecks, he said, or telling the Internal
Revenue Service how much they made.
Mr. Thompson is part of a tiny but
increasingly flamboyant fringe of American business.
Arguing that the federal tax laws do not apply to them,
these small companies are thumbing their noses at the
I.R.S. in a very public way: they have not only stopped
withholding taxes and turning them over to the
government, they are also bragging about it on Web sites
and radio talk shows, and organizing seminars to promote
the gospel of defiance. And they are boasting that they
must be right because the I.R.S. has not come after
them, even though it knows what they are doing. Mr.
Thompson noted that he had not sent a weekly tax payment
to the I.R.S. since July, yet "I have not been drug
off to jail."
Indeed, the I.R.S. has not only failed
to pursue these businesses, it has in some cases given
refunds after they claimed they did not owe taxes paid
earlier. In at least two cases, the businesses say they
even received apologetic letters from the I.R.S. for not
rescinding penalties and issuing the refunds sooner.
Many tax experts express astonishment
at the idea that the I.R.S. is aware that legitimate
businesses are cheating yet has not even written to ask
why their tax payments stopped, let alone begun action
to make them pay. This undermines the principle on which
the American tax system is based, they say: people who
do not pay their taxes will pay the consequences. How
many businesses are taunting the I.R.S. this way is
impossible to know. At least 23, including Mr.
Thompson's aviation products company, a Florida
marketing firm and a Texas plastics company, have made
their decisions public. Sixty business owners and their
advisers met on the weekend of Nov. 11 in California to
plan how to persuade thousands of others to join them.
Over the years, a number of individuals have claimed to
be out of reach of the tax laws, but experts, including
four former I.R.S. commissioners, said this case was
different. "This is tremendously significant
because we have never before had responsible parties
employers refuse to withhold," said Sheldon Cohen,
a former I.R.S. commissioner. "The system simply
cannot work if they get away with this."
The I.R.S. declined to comment on
whether it was pursuing enforcement actions against the
23 employers, citing a law that protects taxpayer
privacy. But there is no public record showing
litigation or enforcement actions like liens against the
companies' assets. The failure of the I.R.S. to act even
against those who openly defy the tax laws raises
questions about the agency's ability to stop tax
cheating.
Asked whether the I.R.S. was moving
against any such tax resisters, the senior I.R.S.
spokesman, Frank Keith, would say only that "with
limited resources the I.R.S. must often choose which
cases to pursue" and that it focuses on those that
will generate the most revenue. But Jerome Kurtz,
another former commissioner, disagreed. "That's a
nice pat line," he said, "but they don't go
after only the people with the highest income. They
audit hundreds of thousands of returns under $25,000
that produce little or no revenue and they can take
resources from those."
Michael Graetz, a tax policy adviser
under President George Bush and now a professor at Yale,
added that he thought it was a big mistake that the
I.R.S. had not moved immediately against these
employers. "They have to act," he said,
"or this will get out of hand very, very
quickly."
Commissioner Charles O. Rossotti of
the I.R.S. has warned Congress that the agency's
enforcement resources have so shriveled that a growing
number of people will think they can get away with not
paying taxes, and the tax collection system will be
threatened.
Some years ago, the I.R.S. did pursue
organizations that publicly declared they would not
withhold taxes. One prominent case was a church with a
national following, the Indianapolis Baptist Temple.
Unlike churches that accept tax- deductible donations,
the church contended that it answered only to God and
not to any government, and therefore it was not required
to withhold taxes from its employees' paychecks. The
I.R.S. demanded payment, and federal judges ruled that
the church owed $3.6 million in taxes for 1987 through
1993, plus interest. Federal marshals seized the
parsonage on Nov. 14 and are authorized to seize the
church itself, which members are now occupying in
protest.
Since the federal income tax began in
1913 there has been a steady, if small, current of
individuals who assert that the 16th Amendment, which
authorized the income tax, was fraudulently adopted or
that no law makes anyone liable for taxes. The courts
have rejected these assertions, and a few of the most
prominent resisters have been sent to prison. But now
the resistance is undergoing a big change. Not just
individuals are refusing to obey the tax laws; so are
some business owners, on whom the government relies to
withhold taxes from paychecks.
Irwin Schiff, owner of Freedom Books
in Las Vegas and for three decades a promoter of the
idea that the tax laws are a hoax, said he had noticed a
shift five years ago when owners of small businesses
began soliciting his advice on how to drop out of the
tax system. Mr. Schiff and others provided copies of
refund checks from the I.R.S. to small-business owners
totaling $620,000. The refunds were for taxes previously
paid and were issued because a tax return was filed
reporting income as "zero" and stating that
the previously reported wages were really untaxable
"remuneration." In two cases, the resisters
provided copies of what they said were letters of
apology from the I.R.S. and cited them as evidence that
they are right. (Experts say that the refunds and
letters were probably issued in error by processing
clerks rushing through thousands of returns.)
In recent years, Congress has reduced
the resources available to the I.R.S., even as the
number of taxpayers and the complexity of the tax laws
have grown. Congress also imposed new rules under the
1998 I.R.S. Reform and Restructuring Act that make it
much more difficult for the agency to pursue tax cheats.
Under Commissioner Rossotti,
enforcement actions have declined sharply as the agency
has focused on what he calls customer service. Seizures
of property have fallen to an expected 156 this year
from 10,000 annually in the early 1990's, and even
prominent tax advisers have said that clients who owe
large amounts of taxes are not being forced to pay. The
views of Mr. Thompson, the small-business owner, on the
American tax system are representative of the tax
resisters.
His company, Cencal Aviation Products,
makes jackets, flight bags and other accessories for
private pilots. Most of his employees sew, pack boxes or
process orders.
During a two-hour meeting with
employees in the company's conference room in October
with a reporter and photographer from The New York Times
permitted to attend, Mr. Thompson introduced his tax
adviser, a former I.R.S. criminal investigator named Joe
R. Banister. Income taxes, Mr. Banister explained, must
be paid by only a few Americans, primarily those at
foreign- owned companies. Several workers expressed
delight. Now they could take home enough money to pay
their bills, some said. But two older women gently asked
what would happen if the boss was wrong. What if the
Internal Revenue Service came to seize her car and home,
one asked.
"They would have no legal
authority to do that," Mr. Thompson said
confidently. Earlier that day, Mr. Thompson said his
interest was aroused when he volunteered to help the
unsuccessful Congressional campaigns of Devvy Kidd of
Sacramento, a Republican who maintains that the I.R.S.
is "a criminal operation."
Early this year Mr. Thompson met Mr.
Banister, a hero in tax-protest circles because he left
his $80,000-a- year job as an I.R.S. special agent last
year after concluding that the tax laws do not apply to
most Americans. Mr. Thompson and Mr. Banister, now a
certified public accountant in San Jose, Calif.,
detailed for employees what they call the 861 position.
The Internal Revenue Code states that taxes apply to all
income, except for exclusions granted by Congress like
the tax-exempt interest from municipal bonds. One
section refers to "all income from whatever source
derived."
Mr. Thompson and Mr. Banister say that
Section 861, and the regulations that carry it out,
define "source" in such a way that the tax
laws do not apply to companies owned by Americans.
Mr. Banister told the employees that
once taxes are withheld and reported to the I.R.S. on a
W-2 or 1099 form, the worker "will be bullied"
into wrongly paying taxes.
"But what happens," Mr.
Banister asked, "if the person that owns your
company says: `Wait a second. I read the law, and I am
not required to give a W-2.' What's the I.R.S. going to
do?"
While Mr. Banister preaches that most
Americans need not pay taxes, he has not followed his
own advice. He said in an interview that he had sent his
taxes to the government.
Mr. Rossotti, who runs the I.R.S.,
said the 861 position was "just plain
nonsense." In 1995 a Tax Court judge rejected a
claim based on that position. Mr. Thompson said that he
knew of that case but that the ruling was from "a
kangaroo court."
Mr. Thompson, like the other defiant
business owners, has also stopped paying state income
taxes. But he continues to pay other taxes, like
property taxes, he said. Mr. Rossotti warned that people
who are taken in by claims that they are exempt from
taxes "put themselves at terrible risk, both
legally and financially," because the I.R.S.
"will take enforcement action to uphold the
law." Yet instead of enforcement, some companies
are getting money back from the government.
Bosset Partners Marketing in
Clearwater, Fla., and N.T.D. Electronics of Huntington
Beach, Calif., say that the I.R.S. refunded more than
$200,000 of withholding taxes from prior years.
Dick Simkanin of Arrow Custom Plastics
in Bedford, Tex., said he was pursuing $2.9 million in
refunds. Mr. Simkanin said he had stopped withholding
income, Social Security and Medicare taxes from his 49
workers' paychecks last January. Since then he has
announced that he will not pay taxes or file tax returns
for himself or his company, and the I.R.S. has not even
called.
"I am not a tax protester,"
Mr. Simkanin said. "I think we need to pay all
required taxes because obviously the different levels of
government need funding to operate, but when government
oversteps its bounds and goes over the law, that is kind
of where you need to put your foot down. I am willing to
pay any tax so long as I am liable."
Mr. Banister, the former I.R.S. agent,
said that he had asked his superiors to show him what
law makes an individual or company liable to pay taxes,
but that they had refused and instead demanded that he
resign. That convinced him, he said, that government
officials knew that the tax laws were "a great
deceit."
As word spreads over the Internet, on
talk shows and at seminars that the I.R.S. has not acted
against the publicly defiant employers, tax resisters
say other employers are dropping out of the tax system
as well.
"There are thousands of us,"
Mr. Thompson said.
