When it comes to tax advice, be careful whom you trust. In our south loop of Chicago tax preparation office, we hear a number of tax tips for small business owners that aren’t based in tax law.
There is some remarkably bad and wrong and hazardous-to-your-health information out there that—despite being repeatedly debunked—just will not go away. Some of those ideas are clearly erroneous, but others can snag even very bright people.
Consider the case of Carter White Rae, a dentist in Michigan. He followed some bad advice and ended up with a bill from the government for over half a million dollars—plus a 45-month jail sentence.
Remember: You may be a logical person, but tax law is not always logical. Even if something makes sense to you—or sounds like it’s the way the law should work—it may still be completely wrong.
That’s why you have me in your corner. And that’s why you should ask me before you take an action that seems too good to be true.
The most dangerous tax strategies are the ones that lead you to believe you do not have to pay any tax at all. Known in IRS lingo as “tax protestor” arguments, they claim that by virtue of little-known quirks in the law or because of never-correctly-ratified amendments, you can somehow sidestep all U.S. tax requirements.
No matter how intricate those arguments can be, they all suffer from the same problem: The IRS and courts reject them. The government has already ruled against them, and if you use one of those arguments, the government will eventually catch up with you and demand its money. It’s a question of when, not if.
Take It from the IRS
The IRS was nice enough to compile a list of arguments that it has heard before and will categorically reject:
- The filing of a tax return or the payment of federal income tax is voluntary.
- Taxpayers can reduce their federal tax liability by filing a “zero return” that reports zero income and zero tax liability.
- Compensation received for personal services isn’t income.
- Military retirement pay isn’t income.
- Only foreign-source income is taxable.
- The IRS isn’t a U.S. agency.
- The taxpayer isn’t a citizen and therefore isn’t subject to federal income taxes.
- The taxpayer isn’t a “person” under the tax law and therefore isn’t subject to federal income taxes.
- Various constitutional amendments permit the taxpayer to avoid taxes.
- Form 1040’s instructions and regulations don’t have an OMB control number as required by the federal Paperwork Reduction Act.
Penalties and Prison
The IRS believes that tax protestor claims are “frivolous” and will have no mercy on you if you rely on one to avoid paying taxes. The courts tend to agree and uphold those penalties—and sometimes impose prison time as well.
Whenever you “willfully attempt to evade or defeat” your taxes, you’re looking at fines of up to $100,000 ($500,000 for corporations) and prison time of up to five years. That’s on top of having to pay the taxes due, the prosecution’s costs, and any other penalties.
How to Spot Bad Strategies
With tax law as complicated as it is, how are you supposed to tell the difference between a legitimate tax reduction strategy and a baseless idea that will get you in trouble?
The main problem with tax protestor arguments is that they claim to let you ignore the plain language of the law—simply by saying that the IRS isn’t legitimate or that you aren’t subject to the rules.
Real tax strategies work within the law, finding deductions or ways to reduce your income that the tax code or IRS have explicitly blessed—rather than going around the law or ignoring it.
Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.
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