So you want to be a tax cheat - Economic Observer - tax evasion - Brief Article

USA Today (Society for the Advancement of Education), Jan, 2002 by Jeff A. Schnepper

IT IS THE BEGINNING OF THE YEAR, and the scammers are out to get you. Don't want to pay taxes? According to some advisors, you don't have to! I can't get on the Web without someone e-mailing me new strategies to set up special personal family or offshore trusts to hide my income from Federal taxation.

Various "constitutional scholars" declare the Federal income tax system to be unconstitutional. If taxes are voluntary, why can't we just opt not to volunteer and choose not to pay? The simple answer is because their strategies and schemes are just plain wrong and illegal; those who offer them as tax solutions are criminals; and those who are being caught are going to jail. Let's look at what's being suggested, and why it just doesn't work.

The family trust gambit. This idea is attractive because it appears, on its face, to make sense. Proponents recommend setting up a family trust to own all your assets. The concept behind it is that the trust is a "business," and by filtering all your "personal" expenses through the trust, they become deductible business expenses, which zero out your taxable income. Advocates of this structure also claim that the trust protects your assets from creditors.

This scheme looks great. The only flaw in the design is that it doesn't work. You can't convert personal expenses into deductible business expenses without a legitimate business. Unfortunately for those contemplating this ploy, the management of your personal and family finances and living expenses doesn't rise to the level of being a business.

The nature of a business, from an income tax standpoint, is an enterprise that has a profit objective. Your objective in managing your family finances and living expenses isn't so much to generate a profit as it is to control your expenditures to create a desired standard of living.

Universally, the courts have rejected these family trust structures. Taxpayers who fell victim to this scheme have suffered additional taxes, penalties, and interest. Promoters of this illegal structure have gone to jail. Don't get suckered into this one.

The law is unconstitutional. If the tax law is unconstitutional, then you don't have to pay, right? Yes, but only if the law isn't constitutional. Here's where we have to be very careful. Let's start with some basics. Neither you nor I are the final arbiter of whether a law is legal. Under our system of government, the legislature (Congress) passes the laws; the Executive Branch (the president) enforces them; and the judiciary (the Supreme Court) interprets them and determines their validity.

The courts have consistently and universally found the 16th Amendment, which validates the right of Congress to lay and collect taxes on income, from whatever source derived, to be valid. Since 1913, there have been literally thousands of cases where the courts have upheld the legitimacy of the Federal income tax. In fact, the issue has been so settled that Congress has legislated, and the courts have imposed, a $25,000 penalty on any taxpayer who even argues this issue in tax court! It would be expensive to choose to argue this point.

Tax protesters have enjoyed Federal hospitality behind bars as a result of ignoring the facts. The 16th Amendment is constitutional.

Now, I don't deny that proponents of the unconstitutional argument have a point. I agree that the ratification by one state may have been improper, but the courts have spoken consistently and, after 89 years, it's time to put this argument to bed.

Excuses for people who cheat. The Federal tax code is complicated, convoluted, and confusing. We've had more than 1,900 code changes over the last five years, and even tax professionals are whirling with glazed-over eyes in this tornado of ever-evolving gobbledygook. If people don't understand the rules, they're prone to break them. Our government sinks in a quagmire of quicksand when it demands its taxpayers support a tax system where half the Supreme Court regularly gets the answer wrong.

The cracks in the Tax Code provide another reason to get imaginative. There's a clear perception of unfairness in the system when a teacher who makes $30,000 a year pays as much as $3,424 in taxes and then reads about the 2,680 Federal filers in 1998 with incomes of $200,000 or more who paid zero taxes! Add to that the drastic cut in the audit rate from 1.28% in 1997 to about 0.50% in 2000 and you have an invitation to get creative, if not outright cheat, on your Federal taxes.

The U.S. Tax Code began as a two-page form with 14 pages of instruction. It provided for a tax of one percent on incomes between $20,000 and $50,000, with a maximum rate of six percent on those over $500,000. That was back when $100 a month made you wealthy.

The laws and regulations that make up the Tax Code increased from 744,000 words in 1955 to 5,600,000 in 1994. (That's when I gave up counting.) Between 1981 and 1997 alone, 11,410 code sections were rewritten.

Until we have at least the appearance of fairness and simplicity, taxpayers will look to cut corners. The Economic Growth and Tax Relief Act of 2001 revises 441 more sections, with different changes being made each year for the next 10 years. Then, unless Congress reenacts the provisions, in 2011, everything goes back to where it was before the act was passed.