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March 4, 2003  
Tax Myths - Paying Taxes Is Not A "Voluntary" Choice


As we approach the traditional tax-filing period, many Webmasters look for methods to cut their tax bills. Unfortunately, a number of tax scams also begin to appear at this time of the year, particularly the "voluntary tax" myth. On a variety of sites and newsgroups, you will find arguments indicating that the duty to pay taxes in the United States is a "voluntary" one. Such an assertion is no more legitimate than the SPAM you receive from individuals in Nigeria that want to send you a few million dollars.

Individuals arguing in favor of the "voluntary" tax position point to Flora v. United States, 362 U.S. 145, 176 (1960). In a twisted bit of reasoning, it is asserted that the ruling in the case establishes, "our system of taxation is based upon voluntary assessment and payment, not upon distraint." Picking up a head of steam, these individuals further argue that the instructions for filling out the 1040 federal tax return form include language to the effect that payment of taxes is "voluntary." Alas, these individuals have overshot the mark and you should not be baited by such arguments. The Flora case involved a question regarding whether a tax assessment had to be paid before the taxpayer could challenge the assessment. The case had nothing to do with the nature of the tax system in the United States and the effort to highlight one sentence in the decision is completely off base. The court did make a comment regarding "voluntary" taxation, but the terminology is particular to definitions in the tax code as explained below.

Sorry, You Have To File and Pay

Section 1 of the Internal Revenue Code clearly contains language imposing taxes on the income of individuals, estates and trusts. Section 11 of the Code addresses corporations. Section 6151 of the Code specifically requires taxpayers to submit payment with their tax returns and provides a basis for criminal penalties, including fines and imprisonment, to be levied if taxes are not paid. The courts have historically upheld these legal requirements, as evidenced by hundreds of reported cases involving tax protestors. If you wish to review a few of these rulings, you can do a browser search for the following cases.

United States v. Drefke, 707 F.2d 978 (1983)
United States v. Tedder, 787 F.2d 540 (1986)
United States v. Richards, 723 F.2d 646 (1983)

The Meaning of "Voluntary" In Relation To Taxes

Generally speaking, there are two primary income tax collection methods. The first is to simply have the government track all financial transactions and levy a specific tax against individuals, businesses, trusts and so on. The second method is a "voluntary" system wherein the taxpayer maintains the data and reports the information to the relevant tax agencies. In short, the term "voluntary" refers to the fact that taxpayers are allowed to determine the correct amount of tax, submit the information to the federal and state tax agencies, and pay the relevant amount of taxes. This is the system used in the United States and constitutes the "voluntary" payment of taxes.

The voluntary aspect of the US tax system allows people to become very "creative" when reporting their revenues and taxable income. No matter how you categorize it, taking your better half out for their birthday is not a deductible expense! The government keeps a tab on such creative efforts by auditing a certain percentage of tax returns filed each year for individuals and businesses. If your tax return constitutes the next great American novel, you can expect to pay back taxes, penalties and interest. The financial pain involved is nominal when compared to failing to file any tax returns at all because you are suckered in by the myth of a voluntary tax system.

Penalties for Pursuing Frivolous Tax Strategies

If you intentionally fail to file and pay taxes in the belief that the system is voluntary, you open yourself up to major personal and financial repercussions. Civil penalties for intentionally failing to pay taxes range from 25% to 75% of the underpayment amount not to mention fines totaling up to $250,000. If a finding of felony tax evasion is returned against you, imprisonment of up to five years can be assessed. In short, falling for the "voluntary" tax payment myths can cripple you from a financial perspective and even result in imprisonment. Is it worth it? The following example should prove that it is not.

If we assume you owe $20,000 in taxes, but do not file because you do not wish to "volunteer", the potential penalties could be as follows:

$20,000 in taxes due
$15,000 penalty
9% interest on late taxes
$250,000 fine
Imprisonment - Loss of earning potential

The adult industry is justifiably concerned with obscenity prosecutions. What many fail to realize, however, is that most government convictions in this industry occur for tax-related reasons. In the past, porn stars, toy manufacturers, video companies and a variety of sex-related businesses have been prosecuted for tax evasion. Nonetheless, most people in this industry don't give a second thought to their tax reporting or to pursuing questionable tax strategies. You already face an increased risk of legal exposure because of the nature of your business. Do not exponentially increase that risk by buying into bizarre tax theories and strategies.

I Have Not Paid Taxes For "X" Years

There are a variety of strategies that can be undertaken if you have not paid taxes for a number of years. One popular strategy is the "offer-in-compromise program" with the IRS that allows you to resolve your tax problems and get back into the loop on tax payments. Depending on your situation, the resulting tax bill may be settled for pennies on the dollar. The reason for your failure to pay is immaterial and you can avoid imprisonment and severe financial penalties.

In closing, you must pay taxes on your income. There are effective, legal strategies available for overcoming excessive tax burdens. If you are concerned that you are paying excessive taxes, you should investigate the legal options. Pursuing myths such as the "voluntary" right to pay taxes will accomplish only one thing: crippling your business and you.

The above discussion is intended to be a general commentary on tax issues. Each situation is different and this article is not intended as legal advice for your specific situation. Further, nothing in this article is intended to create an attorney-client relationship. If you have additional questions, please contact Joe Obenberger at info@AdultInternetLaw.com.



Webmaster Resource of the Month

In assisting clients with reviews of their tax returns, we are continually surprised by the mortgages that people have on their homes. If you have a home or are considering buying one, you should understand very clearly that mortgage rates are the lowest they have been in a long, long time. If you go to the bank that handles your checking account for a mortgage, you are going to get a bad deal. You should shop around to get the best rates and the best types of loans. In the current market, practically everyone should be able to get a mortgage if they have sufficient income. This is true even if you have a bankruptcy or poor credit. If you have not refinanced in the past four months, you should shop for a better deal. Does a lower monthly payment sound attractive?

Attached is an interview with Jack Campbell, a mortgage broker in our building with Mortgage Loan Specialists, Inc. Mortgage Loan Specialist, Inc., is the seventh biggest mortgage broker in the United States. Essentially, a mortgage broker is a person that goes out and shops lending sources to find you the best loan. Unlike a bank with three or four programs, a mortgage broker has access to hundreds of programs. Importantly, you should understand that many of the best loans are offered by lending sources that do not deal directly with the public. Educate yourself and save some money.

Click here for interview.

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