The arrest this week of alleged tax dodger Walter Anderson — the Justice Dept. says he owes Uncle Sam $200 million — has piqued some curiosity about tax law. Wei-Wen in New York city wants to know: just where in the law does it say Americans are required to pay taxes?
WHY PAY TAXES?
I've been reading some articles about how we are not "required" to pay any taxes at all. Two main questions that I can't seem to find answers to:
1) What is the IRS definition of income for tax purposes? I searched the site, and could not find any such definition.
2) According to the 1040A, there is a section that states "By law, you are required to pay your share of federal tax..etc..etc." Which law states that U.S. citizens are required to pay taxes? — Wei-Wen L., New York
If you'd like to learn more about these novel interpretations of the U.S. tax law, there are lots of folks sitting in federal prisons who can fill you in on the details. (There could soon be one more, following the arrest earlier this week of Walter Anderson for allegedly failing to pay more than $200 million in income taxes by moving money through offshore bank accounts to make it look like he had no income. Andersen has pleaded not guilty.)
Unfortunately, there are many more of these unorthodox "tax experts" who have not yet been locked up and who are eager to expound on all manner of "legal arguments" why U.S citizens are not, in fact, required to pay taxes. Some challenge the legitimacy of U.S. currency. Others take aim at the Federal Reserve. And others cite a variety of tax-related Congressional actions over the years as "unconstitutional."
With a set of tax laws so complex that no two accountants will prepare your return exactly the same way, it should come as no surprise that there is no one specific law you can point to requiring you to pay income taxes. The latest complete re-write of the tax code was in 1986.
But the authority you're asking about is contained in a mind-numbingly complex series of Acts of Congress and legal decisions in case law, one build on top of the next. The staggering volume of this legal mess invites challenges from those who would like to find a single line somewhere that brings down the house of cards and proves it all invalid.
It is true that it took several false starts before the legal foundation for taxing personal income was strong enough to make it a permanent source of revenue for the U.S. government. The first U.S. income tax, enacted in 1862 to pay for the Civil War, was repealed 10 years later.
In 1894, Congress tried to bring back income taxes, but a year later the Supreme Court ruled them unconstitutional in the landmark "Pollack" case. (A central issue in that case was how these taxes would be "apportioned" to the various states.) By 1913, Congress gave it one more shot, and the states ratified the Sixteenth Amendment, which says:
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."
Some modern tax skeptics claim this amendment was not properly ratified. Alas, so far, none of them have been able to convince a federal court of the validity of their claim.
Worse, many of these people offer themselves up as "tax consultants" and bilk hard-working people out of "advisory fees" based on their delusional claims. They are about as legitimate as those fictitious e-mails from ousted Nigerian officials offering to pay you handsomely for helping them move millions of dollars out of their country.
The IRS provides a nice summary on the history of the laws that gave rise to the U.S. income tax. You can also find more on the history of the U.S. income tax on the Web site at Colorado College. Here are some highlights from that page:
- 1916-1951: new tax legislation enacted every year
- 1939: U.S. Tax Laws first codified as an integral part of the U.S. Code -- IRC 1939
- 1954: U.S. tax code amended and becomes IRC 1954
- 1986: Code completely revamped -- IRC 1986 US Code, Title 26, Internal Revenue Code of 1986
- 1997: Taxpayer Relief Act -- new beneficial rules to offset education costs
- 2001: Economic Growth and Tax Relief Reconciliation Act -- phased in changes with sunset provisions causing the new tax laws to terminate in 2011, leaving the clean up to future sessions of Congress. Middle income taxpayers assume burden for repealed estate tax provisions by now paying capital gains income tax on decedent's built in gain.
As for the various types of income, they are also thoroughly defined in the tax law (and on the IRS Web site). There is wage income, interest and dividend income, capital gains, alimony, rental income, lottery winnings -- you get the idea. And there's a place for each and every one of them on your Form 1040 tax return.
Sorry to be the one to break the bad news.