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US Citizens Use Loophole To Withhold Tax From Government

Mike Godfrey, Tax-news.com, New York

22 November 2000


Remember the fuss in 1998 about IRS agents accused of harassing taxpayers? Later it seemed that much of the evidence was misleading, but Congress was dominated at that time by an anti-IRS right-wing tendency which withheld enforcement funds and leant heavily on the agency to moderate its enforcement techniques. As a result there is now almost no chance that tax-payers will be audited, and the IRS says it has to concentrate its enforcement action on cases which it can be sure to win.

This apparently doesn't include what are called 'Section 861' cases in which a rapidly growing fringe of US citizens are refusing to pay income tax on the grounds that the IRS has no authority to collect it from them. Until recently the '861' logic was being applied by only a small band of individuals, but recent publicity has attracted a considerably wider range of dissident taxpayers including companies which have stopped withholding payroll tax or reporting employee incomes to the IRS.

The 861 'case' is based on a close reading of the wording of relevant sections of the IRS code. In a nutshell, the argument goes like this: Income tax applies to 'gross income'; Section 61 defines gross income as 'all income from whatever source derived'; Section 861 gives a list of 'sources' which doesn't include employment remuneration.

The 861 argument may be right or wrong in a strictly legalistic sense, but what seems remarkable is that the IRS has not attempted to take enforcement action against any of the thousands of US citizens who are defying it, although it knows perfectly well what is going on. It's at least possible by now to hazard a guess that the IRS thinks it might lose a case if one was brought. Here is an Internet site which contains the transcript of a meeting between one '861' adherent and some IRS officials: http://www.taxableincome.net/case1/transcript.html. It's fairly inconclusive, but the IRS certainly doesn't seem to put forward strong arguments against the '861' position.

No doubt the taxpayers who are beating the IRS with an '861' stick are behaving selfishly, in the sense that it must be inequitable for a tiny minority to get a benefit which if extended to all citizens would bring the country to its knees. But the IRS is even more mistaken in not doing anything about it. Either the law is badly drafted, which could be put right by Congress in a matter of minutes; or the citizens who are harassing the IRS are wrong, in which case the IRS should act against them.

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