Tax Law Special Report
April 2005

IF YOU ARE GOING TO TELL THE IRS
YOU DON’T OWE ANY INCOME TAX,
DON’T USE ANY OF THESE EXCUSES

By Nathan Hannah

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Since it’s tax time, I’ll be brief this month. As my friend Henry Amado CPA asks me whenever I talk to him this time of year: “Have you filed your tax return yet?” If you haven’t, or if you have and claimed that you don’t owe any tax, then keep reading.
The IRS recently issued Notice 2005-30, which says that if you claim that you don’t owe income tax for any of the reasons listed below, you will be deemed to have filed a “frivolous” return and will face a $500 penalty, and may be subject to civil penalties of 20% or 75% of the underpaid tax (in addition to the tax and interest on the tax). Those who pursue frivolous tax cases in the courts may face an additional penalty of up to $25,000. Here are the reasons that the IRS has deemed frivolous:

• A taxpayer can avoid tax by filing a return that reports zero income and zero tax liability.
• A taxpayer may avoid income tax by referring to a separate "straw man" entity created by the use of the taxpayer's name in all capital letters in government documents.
• Wages are not taxable income, under Code Sec. 1001, because taxpayers have basis in their labor equal to the fair market value of the wages they receive; thus, there is no gain to be taxed.
• The 16th Amendment is invalid because it contradicts the original Constitution, was not properly ratified, and lacks an enabling clause.
• A taxpayer can make a "claim of right" to exclude the cost of his labor from income.
• Only income from a foreign source is taxable under Code Sec. 861.
• The taxpayer claims not to be a "citizen" or a "person" within the meaning of the Internal Revenue Code.
• Residents of States, such as New York or California, are residents of a foreign country and therefore not subject to U.S. income tax.
• A taxpayer can escape income tax by putting assets in an offshore bank account.
• A taxpayer can eliminate tax by establishing a "corporation sole."
• A taxpayer can place all of his assets in a trust to escape income tax while still retaining control over those assets.
• A taxpayer can deduct amounts paid to maintain his household by establishing a home business.
• Nothing in the Internal Revenue Code imposes a requirement to file a return.
• Filing a tax return is "voluntary."
• Because taxes are "voluntary," an employer doesn't have to withhold income or employment taxes from employees.
• A taxpayer can refuse to pay taxes if he disagrees with the government's use of the taxes it collects.
• A taxpayer can escape income taxes or the tax system by submitting a set of documents in lieu of a tax return.
• A taxpayer can avoid tax by filing a return with an attachment that disclaims tax liability.
• A taxpayer can avoid tax by filing a return with an altered penalties of perjury (jurat) statement.
• Certain taxpayers can claim a "reparations tax credit" to right wrongs done in the past.
• By purchasing equipment and services for an inflated price, a taxpayer can use the Code Sec. 44 disabled access credit to reduce tax or generate a refund.
• Under Code Sec. 3121 taxpayers can deduct the amount of Social Security taxes paid or get a refund of those taxes.
• A taxpayer may sell (or purchase) the right to claim a child as a qualifying child for purposes of the Earned Income Credit.

You shouldn’t have to think about most of these for very long to realize that they won’t work. If you are considering any tax avoidance method, remember my adage: if you can think of it, someone else has probably already tried it. Happy filing!

 

This communication is designed to bring legal developments of interest to the attention of our clients and others. It should not be relied upon as a substitute for specific legal advice in a particular matter. For further information on any of the subjects discussed, or for legal advice in connection with any particular matter, please contact us.