Just in time for tax season, the U.S. Justice Department is suing the founder of a charitable organization for allegedly peddling a national tax-fraud scheme that it says has cost the government $21 million.
The government charges in its lawsuit filed earlier this month that Robert L. Schulz of Queensbury, N.Y., used the charity, the We the People Foundation for Constitutional Education, to falsely tell donors that they could legally avoid having federal income taxes withheld from their paychecks.
Schulz, a high-profile tax protester, denies any wrongdoing and maintains that the foundation simply educates people about the U.S. Constitution.
Until the government responds to the foundation's petition challenging its legal authority to collect income taxes and the authority of the Internal Revenue Service to withhold them from people's paychecks, Schulz said he and his followers shouldn't have to give it any money.
‘A right ... to withhold our taxes’
"We have a First Amendment right to withhold our taxes if the government does not respond to our grievances," he said.
Schulz also maintained that the Justice Department lawsuit is invalid because he doesn't sell the information on his Web site, he gives it away. The foundation requests a donation for the material.
Donations to the foundation, which have totaled some $2 million since 2000, have helped it pay for civic education, legal advocacy, and activism efforts in support of its beliefs.
Because the foundation is a charity, the donations are tax-deductible for donors who pay income taxes.
Some experts say they are puzzled that the foundation, listed as a legitimate charity by the IRS, hasn't lost its tax-exempt status.
"It is not charitable to provide tax advice to the public," said Bruce R. Hopkins, a lawyer in Kansas City, Mo. who has written several books on nonprofit law.
As is its policy, the IRS declined comment on a specific case. In general, organizations can qualify for nonprofit status if they show their mission is educational, a spokesman said.
Organizing opposition, taking out ads
Schulz and the foundation have been leading players in the anti-tax movement. We the People has sponsored meetings of tax protesters and paid for full-page newspaper advertisements, including a 2001 ad in USA Today that proclaimed, “Congress has yet to pass a law that requires most Americans to file a tax return or pay income tax.”
After the USA Today ads ran, an outraged Congress held hearings on tax protesters, and the federal government stepped up its enforcement efforts.
Since then, life has become more difficult for tax protesters. The Justice Department has obtained more than 230 injunctions since 2001 to stop promoters of tax-fraud schemes.
“People who sell tax scams are asking for trouble for themselves and their customers who participate in them,” says Eileen J. O’Connor, assistant attorney general for the Justice Department’s Tax Division.” They and their customers temporarily enrich themselves at the expense of law-abiding taxpayers. The Justice Department and the Internal Revenue Service are determined to stamp out these scams."
The Internal Revenue Service says the arguments made by tax protesters are frivolous and has posted a rebuttal of the latest anti-tax claims on its Web site.
In recent years, the tax agency has successfully prosecuted people who have promoted schemes to escape taxes or who have boasted publicly of their ability to avoid making income-tax payments, including Irwin Schiff, Lynne Meredith, Larken Rose and Richard Simkanin. All are in jail. The IRS is continuing to pursue criminal investigations of others.
People like Irwin Schiff, who represent the new Internet-based tax protest movement, are different from previous income-tax opponents, according to J.J. MacNab, a financial planner in Bethesda, Md., who has testified before Congress on tax schemes and is writing a book about tax protesters.
New breed of tax protester
In the past, MacNab said, people withheld their tax payments as an act of civil disobedience, for example against the Vietnam War. They knew and accepted jail or fines as the consequences of their behavior.
By contrast, the new protesters are in it for themselves, she wrote in testimony submitted earlier this year to the Senate Finance Committee. "They want the benefits of withholding funds from government (personal enrichment, punishing government programs they don't like) without any of the negative consequences. They are not practicing civil disobedience; they are following a cult-like belief system made up of absurd pseudo-legal theories and wild-eyed conspiracy tales."
Schulz, a former environmental engineer, said he gets no personal benefit from his crusade. According to the 2005 Form 990 tax filing for the foundation, which received $250,000 in donations that year, he collects no salary for his efforts.
Schulz says it's the principle that matters. "The Constitution doesn't defend itself," he said.
But he adds that his fight against the federal government has not been easy or pleasant. "The IRS can turn anybody's life upside down," he said.
Elizabeth Schwinn is a staff writer for The Chronicle for Philanthropy.