The final, drop-dead tax deadline is quickly approaching. S Corporations have their final returns due on September 15th, and personal tax returns are due October 15th (assuming both filed their 6-month extensions on time back in March and April, respectively.
Of course, the subject of paying taxes is always an emotional one for many people. Around this time of year we start seeing arguments that taxes are illegal, unconstitutional and voluntary. Just in case you’re curious, here’s the IRS position on that argument … along with some of the penalties they can choose from.
The idea that paying taxes is voluntary comes from the Form 1040 handbook. In there, the IRS states that the tax system is voluntary. There’s also a Supreme Court decision, called Flora v. United States, 362 U.S. 145, 176 (1960), that stated “[o]ur system of taxation is based upon voluntary assessment and payment, not upon distraint.”
The problem is that the word “voluntary” as it appears in that court case refers to the fact that we voluntarily decide how much in taxes we should pay by completing and filing our tax returns. Not filing a tax return is not an option. Once your income hits a statutory threshold you are required to file a return (Sections 6011(a), 6012(a), et seq., and 6072(a). See also Treas. Reg. § 1.6011-1(a)). In another court case (United States v. Tedder, 787 F.2d 540, 542 (10th Cir. 1986)), the court stated “although Treasury regulations establish voluntary compliance as the general method of income tax collection, Congress gave the Secretary of the Treasury the power to enforce the income tax laws through involuntary collection … The IRS’ efforts to obtain compliance with the tax laws are entirely proper.”
The IRS is not impressed with people who push this scheme onto others. In 2005, Royal Lamarr Hardy got 156 months in jail for selling a tax evasion scheme called the “Reliance Defense” that told people that the laws, as written, did not impose a legal obligation to pay tax or file a return). He was also ordered to pay costs of prosecution in the amount of $59,267.88, and restitution to the IRS for $197,555. And, in 2007 another gentleman, Robert L. Schulz, along with his organizations, WE the People Congress and We the People Foundation, were permanently barred from promoting a tax scheme that told employers and employees to stop payroll withholdings, as it was voluntary, not required. The First Amendment didn’t save Mr. Schulz because it incited criminal conduct. The court also ordered that any web sites selling materials in this vein may be shut down.
So, what happens if you try on the “taxes are voluntary” argument? Well, there’s a great quote in the case United States v. Sloan, 939 F.2d 499, 499-500 (7th Cir. 1991), that says: “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.”
Here’s just a few things the IRS has to choose from:
- An accuracy-related penalty equal to 20% of the underpayment, when the underage is due to negligence or disregard of the regulations; or
- A civil fraud penalty equal to 75% of the underpayment, where the underpayment is due to fraud; or
- Where you claim an overpayment in error, a penalty of 20% of the excessive amount may apply; plus
- An additional tax penalty when your return is filed late because of your disallowed return, or, if your return is filed late because you chose to make a frivolous argument, that penalty can be tripled.
In the 1980s, Congress got into the act, and got tough with taxpayers misusing the courts and obstructing the appeal rights of others. Section 6673 allows the courts to impose a penalty of up to $25,000 when they come to any of three conclusions:
- A taxpayer instituted a proceeding primarily for delay,
- A position is frivolous or groundless, or
- A taxpayer unreasonably failed to pursue administrative remedies.
The reasoning behind this was set out in another case, Coleman v. Commissioner, 791 F.2d 68, 72 (7th Cir. 1986): “The purpose of § 6673 … is to induce litigants to conform their behavior to the governing rules regardless of their subjective beliefs. Groundless litigation diverts the time and energies of judges from more serious claims; it imposes needless costs on other litigants. Once the legal system has resolved a claim, judges and lawyers must move on to other things. They cannot endlessly rehear stale arguments … [T]here is no constitutional right to bring frivolous suits … People who wish to express displeasure with taxes must choose other forums, and there are many available.”
And, if you still don’t get the point, there’s always criminal prosecution. A frivolous tax argument or failure to pay taxes based on such an argument can be classified as a felony for which the penalty is a fine of up to $250,000 and imprisonment for up to 5 years. Or, when you lie in connection with not paying your taxes, you can get the $250,000 fine AND a jail term of up to 3 years.