Defying the I.R.S., Anti-Tax Businesses Refuse to Withhold
By David Cay Johnston

(This article appeared in The New York Times on November 19th, 2000.) www.nytimes.com/2000/11/19/business/19TAXX.html

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 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, a Florida marketing firm and a Texas plastics company, have made their decisions public. Sixty business owners 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 a steady, small current of individuals have asserted that the 16th Amendment, which authorized the income tax, was fraudulently adopted or that no law makes anyone liable for taxes. Courts reject these assertions, and a few prominent resisters have gone to jail.

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.

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.

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.

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. 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 defiant employers, tax resisters say other employers are dropping out of the tax system as well.

"There are thousands of us," Mr. Thompson said.

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