Taming your 1040
And why some avoid this annual rite
Switch on the calculators and slice open those W-2s. It's tax time again.
Between Jan. 1 and April 16 - this year's tax deadline - some 130 million returns will be sent in to the US Internal Revenue Service, electronically or by mail. In addition, millions of taxpayers will file state and local taxes.
While Americans frequently grumble about taxes and the IRS, the reality is that just about everyone pays their taxes, year in and year out.
But what about the nonpayers - the tax rebels? People who for ideological or personal reasons don't join the mid-April payment parade?
No one knows exactly how many noncontributors there are. Estimates put them in the millions.
A few tax evaders attain notoriety, the latest being Marc Rich, the financier indicted for dodging some $48 million in taxes and recently given a controversial pardon by then-President Clinton. But most are small operators with a scheme.
And not all of them keep a low profile. The antitax lobby has grown more sophisticated, using the Internet to advance its case for nonpayment.
The government's reply? File and pay, or face fines and perhaps prison.
In fiscal year 1998, some 1,500 individuals were prosecuted and sent to prison for tax fraud, according to the IRS. Federal courts have repeatedly ruled that if you have earned income and owe money to the US Treasury, you must pay.
"There is no gray area on this issue," said IRS Commissioner Charles O. Rossotti in a prepared statement.
Tell that to the tax rebels. For many of them, the fact that a new president has made big proposed tax cuts a centerpiece of his administration may not be enough.
Consider Corey White, who works for a telephone company in Philadelphia. Mr. White has been in and out of courts over the past few years arguing he does not have to pay taxes on his earnings between 1990 and 1993. "If the compensation does not come from federally taxable activity, than it is not income subject to an income tax," Mr. White asserts.
Working for a locally based phone company, he says, is not "federal activity." White has now lost in two courts, but he says he will seek additional redress if the issue is pursued by the IRS - if they impose liens on his assets, for example.
White is one of countless individuals claiming they do not have to pay taxes. One current Internet mass-mailing tells readers that "you can legally, lawfully and ethically never file a 1040 tax return again." After contacting a listed phone number, you are directed to an organization called the Institute of Global Prosperity (IGP).
Individuals who contact the IGP learn they can get "educational materials" on how not to pay taxes and to create legal defenses for nonpayment.
"We are entrepreneurs providing educational materials. We are not licensed to give tax advice," says Victoria Sleeper, an associate with IGP.
The "educational materials" claim that tax filing is based on the 16th Amendment, which, the documents maintain, was never ratified, meaning Americans are off the hook on taxes. Individuals, according to the group's materials, can break off their "implied contracts" with the IRS. (According to the archivist of the United States, the 16th Amendment, which gives Congress the power to "lay and collect taxes on income" was ratified Feb. 3, 1919.)
Whatever the legal merits of the IGP position, the IRS is not about to welcome citizen noncompliance. According to the IRS, constitutional arguments about not paying taxes are primarily based on two spurious schemes:
*Setting up a supposed trust, to which a person assigns all of his or her earnings and other income. By doing this, the individual claims to have "disposed" of his or her income.
*Setting up an overseas trust to also assign earnings and income. People who do this argue their money is now "overseas," and outside the reach of US tax collectors.
US courts, however, have consistently ruled against such strategies, if designed to avoid tax compliance.
Other tax scams are perpetuated by employers, not workers: Some do not withhold federal income taxes or employment taxes from wages paid to employees. In the past three years, some 127 individuals have been sentenced to confinement in federal prisons, halfway houses or home detention for evading employment-tax procedures, according to the IRS. Roughly 86 percent of these persons served an average imprisonment of 17 months, plus had to make restitution for the monies not withheld, including payment of interest and penalties.
"Income and employment taxes must be paid," says Joe Kehoe, commissioner of the IRS Small Business and Self-Employed Division.
But what if a person genuinely cannot pay his or her tax bill? Do such individuals have to be forever locked in combat with federal tax collectors?
Not at all.
Current tax law provides a "safety net." First, individuals must file their 1040, or other required forms each year. If they can't file the forms by the April deadline - because, say, certain documents are missing - taxpayers can file Form 4868 to get an automatic four-month extension. An estimated 8 million taxpayers did this in 1999.
If you file for an extension, you must still make an accurate statement of any tax owed and pay the amount by April 16. If you can't pay the full amount, you will be subject to interest and penalties on the amount not paid.
Fortunately, most Americans have been able to cobble up the amount they owe. In fact, about half of all filers will get a refund, according to IRS estimates. Last year, $120 billion in refunds were issued, averaging about $1,600 per refund.
But all is not lost for those who owe money and genuinely can't pay. Just attach form 9465 to your 1040, and request to set up an installment plan. Even if the IRS allows you to pay in installments, you will still be subjected to interest and penalties on the unpaid tax.
Finally, a word about audits: It would be foolish to not file just to escape an audit. Few taxpayers are ever audited. The rate, in recent years, has run below 1 percent of all returns filed, though the likelihood of an audit increases as you enter higher income brackets, or if your return becomes more complex.
Taxpayers now have a number of safeguards in place to help them if they get into a tax battle. In recent years, the IRS has been under greater media and congressional scrutiny, which - some critics say - has forced the agency to move with greater caution than in the past in dealing with taxpayers. Now, the IRS must adhere to a "Taxpayer Bill of Rights," which sets forth citizens rights when dealing with tax collectors.
The IRS has also established a layer of problem-resolution offices, to help taxpayers find answers to complex tax issues.
(c) Copyright 2001. The Christian Science Publishing Society