A Taxpayer's Rights: Gail Clarifies the Constitution

This week Gail clears up a reader's misconceptions about what the Constitution says about taxes and also gives taxpayers some important tips and background information.

Dear Gail,

In the Constitution of the U.S. it states that taxes are voluntary. So what happens if I decide not to file my taxes based on that? Also, I have had people tell me that if you never file taxes you never have to pay because the IRS won't know who you are. Is this true? I would just love to know the answers to these questions and don't know who else to ask.

Thank you,

Dear Donald,

Clearly you have not actually READ the Constitution of the United States of America! If you had, you would have learned the following:

Article I, Section 7: "All bills for raising revenue shall originate in the House of Representatives."

Article I, Section 8: "Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises."

Amendment XVI: "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived."

Maybe you're confused about the fact that our income tax system is based on "voluntary compliance." An IRS representative explains that's analogous to obeying traffic laws. "'Voluntary compliance' is when you stop at a red light whether there's a police officer there or not."

In other words, "voluntary" doesn't mean "optional." It simply means that the individual taxpayer is allowed to report his/her income, determine the amount of tax due, and send in the appropriate amount of money.

A number of court cases have affirmed this, including one that went all the way to the Supreme Court. That decision found that "[o]ur system of taxation is based upon voluntary assessment and payments, not upon distraint."

OK — I had to look that one up myself. "Distraint" involves using "distress." It can mean the forceful taking of property in order to compel payment.

In other words, the IRS doesn't decide how much income tax you owe and then swoop down and seize your car and other possessions until you fork over the money. You get to "voluntarily" remit the payment that you have "voluntarily" calculated.

However, this should not be taken to mean that the government does not have the constitutional power to force you to pay taxes. This was re-affirmed as recently as last month in the case of Richard Simkanin, a Dallas business owner who, like you, claimed he was not obligated to pay taxes. On top of that, he asserted that he didn't need to collect taxes from his employees, so he instructed his accountants not to withhold payroll taxes from employees' paychecks.

On Jan. 8, the jury found him guilty on 19 counts. He faces a $3.95 million fine and a maximum sentence of 129 years.

In the words of Michael Lacenski, the IRS Special Agent in Charge of the Dallas office, "The jury's verdict reaffirms that this is a nation of laws, not of anarchy. Taxes provide for the freedoms we all enjoy as Americans. Those that mock our Government and our tax laws will feel the full force of the law."

I don't know where you got your information, but you are being led astray. I strongly suggest you read an IRS publication called "The Truth About Frivolous Tax Arguments." You can find it at: www.irs.gov/pub/irs-utl/friv_tax.pdf.

Frankly, people like you, Donald, make me very angry. You think you have the right to enjoy all of the privileges we have in this country and yet expect the rest of us to pay for them. You probably think you deserve Social Security even if you don't pay into the system!

I have one piece of advice for you and anyone who thinks like you: Emigrate!

Dear Readers,
For those of you who recognize and accept our obligation as citizens of the country, here are some income tax filing tips, courtesy of the IRS. All of the forms and publications mentioned can be found on their Web site: www.irs.gov.

First of all, thanks to the legislation passed last year and in 2001, you could be in for a happy surprise. Many folks will see their 2003 tax bill go down compared to the previous year's bill because of lower rates for income tax, dividends, and capital gains, and an increase in the standard deduction.

On the other hand, as I wrote in my first column of this year, you could find yourself among the millions of tax filers ensnared by the insidious "Alternative Minimum Tax." In that case, your tax bill will be higher than you expected.

Who needs to file a tax return? That depends upon your income and your filing status. In general, you need to file if your income is at least the following:

Single: $7,800
Head of Household: 10,500
Married Filing Jointly 15,600
Married Filing Separately 3,050

But even if your income doesn't meet the threshold, and you don't owe any income tax, it can pay to file. That's because of something called the Earned Income Credit. If you qualify, you can receive up to $2,547 if you have one child and $4,204 if you have two or more. But you don't get the check if you don't file.

While it's pretty obvious that salary and wages are "taxable income," other types of income aren't so clear-cut.

For instance, tips are taxable. If you work as a waiter or drive a cab, you're supposed to keep track of your tips on a basis. If you receive $20 worth or tips or more, you're supposed to notify your employer, who is required to withhold FICA tax. (See the IRS Publication 531 or Publication 3148.)

While child support is not taxable, alimony payments are. If you're the one paying the alimony, it might be deductible. (See IRS Publications 504, 402, and 452.)

Buy a car last year? The rebate you got from the manufacturer is not considered taxable income.

Workers' compensation and welfare benefits are not taxable, either — but unemployment benefits are.

You also don't owe income tax on any inheritance you received.

But some insurance transactions can be taxable. For instance, if you cashed in a life insurance policy, you owe income tax on any amount that exceeds the total of your premiums paid.

However, if you were the beneficiary of a life insurance policy on someone who died last year, the money you received is not taxable.

Win the lottery or hit the jackpot in Vegas? Congratulations, but you will have to pay taxes on your winnings. However, you're not taxed on the full amount because you get to reduce your winnings by the amount of your losses. (You did save all of those losing lottery tickets, didn't you?)

If you made gifts to charity or a religious institution, these amounts are deductible. But in order to take the deduction, you have to itemize. If you take the standard deduction, you don't get this break. And remember, you need a receipt for cash donations in of $250 or more. Donations of property, such as securities or a car, are capped at their fair market value. (See IRS Publication 561.)

There are big changes in 2003 when it comes to investments. The long-term capital gains rate has been reduced to a maximum of 15 percent (from 20 percent through 2008 — but this only applies to assets you sold after May 5, 2003).

In addition, dividends paid on "qualifying" stock also get a break: instead of being taxed at your ordinary income tax rate, they are taxed at a maximum of 15 percent (through 2008). The 1099 you receive from your broker or mutual fund company will break down which capital gains and dividends qualify. (See IRS Publications 17, 550, and 564.)

If you have a loved one on active duty in our Armed Forces, you are entitled to special tax relief. For instance, take the provision that says any taxpayer can exclude the profit made on the sale of a home as long as he lived in it for 2 out of 5 years before the sale. If you don't meet this test, then the gain is taxable.

However, overseas duty might cause someone in the military to not meet that "2 out of 5" requirement. Yet, when the person returns to the States, he could be re-assigned and have to move, forcing him to sell the home.

The "Military Family Tax Relief Act" suspends the 5-year test for up to 10 years in the case of military personnel or those in the Foreign Service who are on extended duty. The change applies to residences sold after May 6, 1997, which means you might have to file an amended return. But the savings can be worth it. If you sold your home before 2001, the Act gives you more time — until Nov. 10 of this year — to file an amended return.

If you lost a loved one on active duty, the Act doubled the death benefit to $12,000 and makes the entire amount income tax-free. It covers deaths occurring after Sept. 11, 2001. If you already paid tax on the benefit you received, you can file an amended return by using Form 1040X.

If your situation is fairly simple, or you just love all this tax stuff, then consider filing online via the Internal Revenue Service's "Free File" program. You can prepare and submit your federal return online — free of charge. Approximately 2.8 million people used it last year (the IRS swears it's "secure") and improvements have been made in this year's version.

On the other hand, if you're like me and all this makes your head spin, then by all means consider having an experienced tax professional complete your 2003 tax return for you. Just be sure you know who you're dealing with. The IRS suggests avoiding a tax preparer who promises to get you a bigger return than others say they can get for you as well as anyone who bases the fee on the size of the refund you get.

There's a wealth of information on a special section of the IRS Web site called "1040 Central." You can also download any forms you need.

I recognize that nobody "likes" paying taxes. However, if you're unhappy with the current system, then work to change it. Like the AMT. I despise the Alternative Minimum Tax. If you feel the same way, let your representatives in Congress know how you feel. Don't just whine. And don't think you have a "right" to not pay your income tax!

Hope this helps,


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