Taxes: Tax Protest Blues

The business of publicly pressuring government to reduce income taxes through protest actions—as opposed to "private" routes to tax reduction, such as hiding income, engaging in barter, etc.—is becoming increasingly dangerous. As Americans more and more get fed up with the obscene tax load they're being forced to bear, the government finds it necessary to clamp down tighter and tighter, spreading fear and confusion in the ranks of their enemy, the people.

This turn of events became quite clear when the Economic Recovery Tax Act (ERTA) of 1981 was passed amid much media ballyhoo and statist hand-wringing. The tiny tax cuts included in the act—which don't even constitute a real tax cut at all, but rather a slowing in the rate of increase of taxes—are somewhat belied by the nasty new weapons given to the IRS in the same bill. No one seems to be talking about them. Apparently, the attitude is, "We're giving the taxpayers a Big Break by lessening the rate of tax increases, so they'd better pay up."

Some examples include the new penalty whereby you can be fined $500—up from $50—for putting false information on your W-4 at work for the purpose of causing less withholding from your paycheck; new penalties ranging from 10 percent to 30 percent for overvaluation of property resulting in higher depreciation deductions; another penalty equal to 50 percent of the interest due when the IRS finds that you've been "negligent" in preparing your return; and a new, general-interest penalty of 20 percent per year—up from 12 percent—which went into effect in February (and wasn't part of the ERTA). Those are just recent additions to the already formidable arsenal of interest charges, penalties, fines, and jail terms the IRS can dish out to us taxpayers.

Which brings us to the subject of tax protest actions. We're all treated to the recurring spectacle of people trying through one stratagem or another to reduce their tax bite and seeing the IRS instantaneously spring into furious activity, immediately stomping out any such protest, much like the Polish government snuffing out the flame of Solidarity.

Such tax protests take the form of constitutional stands, where it is pointed out that the Fifth Amendment absolves anyone from testifying against himself through filing a tax return that can later be used to convict him of a crime or that the Constitution specifically mandates that "money" shall only be gold and silver coin and therefore you didn't get paid any "money" last year. Or the stand may be that the inflation that government causes must be taken into consideration, to the taxpayers' benefit, when figuring taxes. And the taxpayers always lose.

Then there are the "family estate trusts" or "pure equity trusts," which usually involve assigning your income to a legal entity so that you "have no income" to pay taxes on. Or maybe you've heard of those who just load up their W-4s at work with 20 or 30 exemptions, so that little or nothing is withheld from their paycheck. And there are those who form "churches," then juggle around records and income to prove that the church is "bona fide" (although the First Amendment doesn't contain any such requirement of proof) and thus tax-exempt.

Let me tell you right now: if you try any of these moves, and come to the IRS's attention, you are going to lose—lose money, lose time, lose face, perhaps lose everything if they can happily cause that to happen. Because none, not one, of the tax protest schemes noted above have any basis in law as interpreted by the courts today…which says nothing about whether or not they're constitutionally "correct." As a result, they simply will not "work" to save you from taxes.

All of which is not to denigrate the brave people who stand on principle in opposing the awful looting of productive people in America today. Everyone knows something has to be done, and this is reflected in the growth of Proposition 13-like initiatives, the growth of tax protests everywhere, the growth of organizations like the National Tax Limitation Committee and National Taxpayers Union, and the growth of the Libertarian Party itself, the only large-scale political party in America truly opposed to oppressive taxation.

But the fact is that the tax-reduction schemes above will not work. The courts have examined each and every one myriad times and always come out on the side of the government, with a very few exceptions where a jury was sitting that could block the authorities.

Which leaves us with what? Just this: there are two, and only two, ways that people can and do reduce their taxes. One is through planning and studying and hiring experts to exploit the many crevices in the tax law. The other is undoubtedly the most massive and broad-based "tax protest" of all, the nearly unbelievable explosion of the "underground economy"—the unrecorded, unseen, and untaxed "second economy" that consists of people hiding money, engaging in barter, refusing to report income, engaging in extensive business dealings and practices that simply do not show up on the IRS computers and that can be tracked only with the greatest of difficulty. If you don't believe it, just ask a Mafia soldier in New York, a ghetto dweller in Chicago, a marijuana grower in California, a cocaine importer in Florida, a gambler in Nevada, not to mention millions upon millions of otherwise law-abiding people throughout the country who have enthusiastically dived into the subterranean economy as tax rates have gone out of control.

In fact, the subterranean economy may turn out to be "the ultimate tax protest," and rightly so. During Prohibition, Americans massively rejected a ban on alcoholic beverages, thus making a mockery of the law. Today, it appears that Americans are increasingly deciding to reject the ban on being able to keep and use their money. In doing so, they're making a mockery of the tax system—and steadily, stupendously, and unstoppably increasing the pressure to do something about a tax system, and a free-spending government, run amuck.

Timothy Condon is an attorney and tax specialist practicing in Florida.