IRA Rules Made (Somewhat) Simple

Feds Cracking Down on Get-Rich-Quick Schemes

Q:

From: Kungfurez@aol.com

Subject: question from your website about a “voluntary income tax”

Hello,
    Thank you for your website’s attempt to help clarify some questions regarding the income tax. I was looking into and researching a lot of these “voluntary income tax” claims, including statements made by ex-IRS agents, CPA’s and lawyers.
     My conclusion is that I am certain that there are many scam artists around. I have not come to a conclusion if the income tax is voluntary or not. You say how if someone fails to file tax returns the IRS “is willing to use force.” This doesn’t answer anything regarding the issue of whether the filing and paying of income taxes are voluntary and only raises the question of whether or not the IRS is correctly applying the law or, in Irwin Schiff’s words, are behaving like a “federal mafia.”
       I have researched the constitutionality of the income tax as well. What I don’t understand, and I hope you can clarify for me, is this: if the Constitution allows for direct apportioned taxes and indirect unapportioned taxes, and if the 16th Amendment, according to a Supreme Court Case, offers “no new powers of taxation,” where does the income tax fall? It is clearly a direct, unapportioned tax, isn’t it?
       You said that mentioning these arguments in front of an IRS employee will result in an automatic $10,000 fine and that constitutional protections are “null & void when it comes to taxes for the federal government.” Can you show me where it says that a Citizen’s constitutional protections regarding taxes for the federal government are null and void? I personally am not proud of a system that will result in a $10,000 fine for just posing a question, much like the questions I’ve posed for you in these emails. In the mission statement of the IRS it states that one of their goals and duties is to make the code clear to the Citizens. If asking questions results in large monetary fines then this is clearly a bogus statement.
       I remember seeing a report where a New York Times reporter asked the IRS Commissioner to respond to the claims that the income tax is voluntary and if he could directly answer where in the IRS code it says that one is liable and he answered with, “Ever since I was a young man and started working I felt the desire to contribute my share to the country…” While this can tug on a few heartstrings, any investigator like myself can see that that didn’t answer the question.
       I don’t want you to think I am being difficult or a “tax protester.” Like Commissioner Rossini, I too have paid income tax since I started working. But I am not satisfied with simple name-calling and would like it if you could provide me with some answers–if you are capable–starting with:

-The question of the constitutionality of the income tax with respect to the 16th Amendment providing “no new powers of taxation,” and
-Where it says that all constitutional protections are null and void when it comes to the issue of federal government taxation.
-why does the IRS constantly use the term “voluntary compliance” when the word “compliance” would imply that it is done voluntarily anyway?

  Thank you so much for your help.

Sincerely,
Adam

A:

 Adam:

I am very familiar with the tax protestor movement’s long running attempts to muddy the waters by trying to force us tax practitioners to answer a slew of ridiculous questions, such as those you posed here.  I did go through those motions several years ago and do not have the time to do any more of that.  It is not my place in the big picture, or that of any tax practitioner, to defend the IRS or the tax code against every crazy argument that can be conceived by nut jobs who seem to be more interested in selling their books, tapes and seminars than in actually affecting real change in this country’s tax system.

If you are serious about researching the tax protestor arguments, you should start with the info on the Quatloos website.

You claim to not be a tax protestor yourself, yet your letter resembles exactly hundreds of others I have received from tax protestors over the past decades, each claiming to be doing independent research on the legality of the tax system.  You need to come up with a new angle because this one is worn out.

Kerry Kerstetter

 

Q:

Subject: Taxing Tax Returns

Mr. Kerstetter,

How is it that a personnel tax return from the previous year can be taxed?  This seems like double taxation on the income.  Am I off bases here?

Love your web site. Thanks for taking the time to keep it up.

A:

 I think you are misinterpreting things in regard to the taxation of tax refunds.

There is no taxation of federal income tax refunds because there is no deduction for federal income tax payments.  Occasionally, IRS does include some interest with their refund checks, such as from amended returns.  The interest portion only is required to be reported on the taxpayer’s Schedule B for the year in which it is received, as is interest from banks and most other sources.

It is a different story for state income taxes.  Payments are deductible on the federal Schedule A for the year paid and withheld.  Under the long standing tax benefit rule, if any portion of the tax payments that were deducted on one year’s tax return, and actually resulted in lower federal income tax, is received back as a refund from the state, it is required to be reported as income on the 1040 for the year in which the refund was either received or applied against future year state taxes.

I am as vocal a critic of the tax laws and the IRS when things are unfair as anyone.  In this regard, there really is no double taxation.  If they didn’t have that requirement to pick up the state tax refund as income, it would be possible to literally manufacture bogus deductions.  A person could send in a bunch of state tax payments, deduct them on his federal Schedule A, and then get that same money back from the state tax free.  That wouldn’t be fair.

State tax refunds aren’t always taxable.  Obviously, they wouldn’t be for people who don’t itemize their federal deductions.  Likewise, for 2004 1040s, people who choose to deduct their sales tax instead of state income tax won’t have to pick up any state tax refund as income.  I have also seen several cases where people have had large negative taxable incomes on their 1040s. Since the taxable income would have been negative even without the deduction for state income tax, any subsequent refund of those state taxes is not subject to federal income tax.  This is a classic illustration of the tax benefit rule.  If the deductions didn’t result in any tax savings (benefit), its refund is not required to be included in future taxable income. 

I don’t want to imply that the current system is a perfect offset.  Deducting too much of something on Schedule A is not accurately repaid by picking that same amount up on Page 1 of the 1040 (aka above the line adjusted gross income).  As I constantly mention, increases in AGI trigger dozens of additional ways in which taxes are increased because so many phase-outs and denials of tax deductions and credits are based on AGI, including the taxation of Social Security benefits.  To be perfectly fair with this, the state tax refund would be entered as a negative amount on the following year’s Schedule A.  However, I’m not holding my breath for that to ever be the case.

I hope this adequately explains the issue of taxation of tax refunds and allays your fears of double taxation.

Kerry Kerstetter

 Follow-up:

 Wow.  Thanks for taking the time.  It is much appreciated.

 

Tax schemes saved 61 top firms $3.4B – The use of the word “scheme” is intended to imply illegality. I’m not vouching for these tax savings tricks.  However, what may be a nasty scheme to some is just wise business management to others. To people who love big government and high taxes, anything done to reduce one’s taxes is inherently bad.