U.S. to turn up the heat on tax protesters

Officials say movement costs government many millions
By ROBERT SCHMIDT
Bloomberg News
Feb. 25, 2008

The Justice Department, on the heels of a split verdict in its tax evasion prosecution of actor Wesley Snipes, is planning a crackdown on the so-called tax protester movement.

The protesters, or tax deniers, assert a constitutional right to avoid federal taxes, relying in part on century-old Supreme Court decisions. Their ranks are growing to include white-collar professionals, and they are costing the government millions in revenue, officials say.

"Too many people succumb to the fallacy, the illusion, that you don't have to pay any tax under any set of conditions," said Assistant Attorney General Nathan Hochman, the new head of the Justice Department's tax division. "That is a growing problem."

The movement has been given a boost by the faltering economy and politicians' vilification of the Internal Revenue Service. The Snipes verdict may also have helped.

The actor, best known for starring in action movies like Blade and U.S. Marshals, was acquitted on Feb. 1 by a federal jury in Ocala, Fla., of felony fraud and conspiracy charges.

He was convicted on three misdemeanor counts of failing to pay income taxes, and he faces up to three years in prison at his sentencing in April. He could also be forced to pay millions in back taxes and penalties.

Hochman declined to comment on the case, which was filed in 2006 and predated the department's new initiative.

Snipes' attorney didn't return a call seeking comment.

Internet inspires growth
The Internet has also spurred interest in the tax protest movement as firms sell strategies online and believers encourage others to sign on.

"Any kooky tax protester can put up their theories," said Jonathan Siegel, a professor at George Washington University's law school who has a Web site that debunks tax denier arguments. "It is much easier to get their message before a mass audience."

Tax protesters rely on a range of legal arguments, including that the Constitution's 16th Amendment giving Congress power to "lay and collect taxes on incomes" wasn't properly ratified.

Among other Supreme Court decisions, they cite an 1895 opinion that struck down a federal tax — a ruling that predated the 16th amendment. The protesters also claim that wages aren't legal income, that only residents of the District of Columbia, U.S. territories or federal workers must pay income tax or that foreign, but not domestic, income is taxable.

Those arguments, though rejected by courts, are presented by tax deniers with legal citations and other historical evidence.

The advice is "easy to believe" and is often followed by the naive, Hochman said. "These cases pop up in virtually every jurisdiction in the United States."

New cases coming
The Justice Department plans to announce its stepped-up enforcement program next month. Officials will bring many new criminal and civil cases against promoters of the illegal schemes and their clients, Hochman said.

The details are still being worked out, he said, though it will involve working with U.S. attorneys' offices and the IRS. Enforcement "is going to be amped up," he said.

The agency already has had success in civil cases. Since 2001 it has obtained orders from judges barring more than 300 individuals from preparing tax returns for others or promoting illegal tax strategies.

In prosecuting criminal cases, the Justice Department must prove someone "knowingly and willfully" broke the law. Defendants can win acquittal by arguing they didn't know what they were doing was illegal.

Still, according to agency statistics, prosecutors have a 97 percent conviction rate in tax denier cases. In civil and criminal cases, protesters can be ordered to pay back taxes, plus penalties and interest.

Shared beliefs
According to court documents, Snipes subscribed to some of the theories espoused by protesters. Two others charged in the case, Eddie Ray Kahn and Douglas Rosile, promoted a tax denial strategy known as the 861 argument, prosecutors said.

Protesters say that section 861 of the Internal Revenue Code only requires Americans to pay taxes on some kinds of foreign income. Snipes also allegedly tried to pay some of his taxes with fake checks, labeled "bill of exchange," a common tax denier tactic.

The government said Kahn and Rosile prepared and filed two amended tax returns for Snipes using the 861 theory and requesting almost $12 million in refunds. The IRS never paid.

Snipes also failed to file his 1999 through 2004 federal returns as he made more than $38 million in income, prosecutors said.

Kahn and Rosile, an accountant whose license had been revoked, were convicted of conspiracy to defraud the IRS and face up to 10 years in prison.

Michael Minns, an attorney in Houston who has represented defendants in tax cases, said tax deniers tend to fall into two categories: "con artists" or "crooks" who market the bogus strategies, and "idealists" who believe the schemes are valid.

The Justice Department crackdown, Minns said, is going to "put a lot of nuts in jail" without addressing larger concerns such as corporations using illegal tax shelters or wealthy people moving money overseas to avoid taxes.

"What they are really doing is going after the victims and leaving the billionaires alone," he said.












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