Free Tax Advice (Well, Not Really)

Sophia Loren and Spiro Agnew have it in common. Al Capone, Leona Helmsley, and Wesley Snipes are also all linked, but in a different way. And Martha Stewart and Lindsey Vonn make the list, even though their situations were completely different. What’s the common thread? Tax problems, a fitting subject for a blog five days before April 15th.

It seemed like a great time to pontificate about tax rules and hand out some free tax advice, for today is the last day I will be helping out with the Volunteer Income Tax Assistance (VITA) program. As a reminder, this program partners with the IRS and United Way to allow volunteers to file taxes for free for those whose income falls below a threshold. If your income is low, and you didn’t take advantage this year, mark your calendars next February to find out where the nearest VITA site is near you! As I tell clients, your taxes are done for free, which means you get what you pay for. Same with today’s blog. But here are a few tidbits of tax advice, both frivolous and useful.

The 861 Tax Protest Argument

Wesley Snipes tried to use what is called the “861 argument” to avoid paying taxes, which points to section 861 of the IRS code that defines income sources. Snipes and others argued that the IRS code doesn’t explicitly list all possible ways you can earn income, and therefore any income-generating activity not on the list is not taxable. Multiple tax protesters using this logic have been taken to court in the last thirty years, and none have won.

No tax protester has successfully argued that you can legally avoid paying taxes.

Snipes followed the advice of two fraudsters, Tom Clayton and Larkin Rose, who called themselves the American Rights Litigators, and then later renamed their group the Guiding Light of God Ministries. Much later, they were renamed federal prison inmates # 357-551 and #AX7-832. Not only did Snipes refuse to pay millions owed for money made as a film star, but he attempted to amend previous year filings and request millions in refunds. At one point after he was indicted for tax evasion, he tried to enter South Africa on a false passport. (He also wanted his trial venue to be moved out of Florida because Ocala is racist. The judge disagreed.)

His lawyers claimed these were financial oversights, which seemed a stretch. Nevertheless, the jury acquitted him of the felony charges of conspiracy and fraud and only found him guilty of misdemeanors failing to file returns, which still amounted to three years in jail. Since he never did pay the IRS, they’re still trying to collect on the $23.5 million he owes. He offered $842,000, but the IRS preferred it to be closer to $9.5 million, and the U.S. Tax Court agreed just last November. Perhaps he can use some of the proceeds from his recently published “surprisingly good spiritual thriller” Talon of God.

If someone says they “didn’t have to pay taxes” or that they “don’t pay taxes,” they probably mean that taxes withheld from their pay cover what they owe. If they are refusing to file and they owe money, the IRS just hasn’t found them yet.

Filing Taxes

True Tax Fact: You are not legally required to file a tax return. You are legally required to pay the IRS what you owe by April 15th.

If your income is below a certain threshold ($12k for singles, more for married couples or people over 65), then you aren’t required to file a tax form. Certain types of income, primarily Social Security, isn’t included in that category. The reason many with low incomes should file is that they will get a refund of the taxes withheld from their paycheck. They also might receive a tax credit for the income they earned (the Earned Income Tax Credit, which exists at the Federal and at some state levels). It can definitely be “worth” filing even if your income is small.

If you don’t file, and you didn’t have enough withheld to pay tax on income which the IRS knows about, then you are guilty of tax evasion. You might also be wondering how you would know what you owe, if you don’t try to create a tax return. That is rather the key question. Tax filing is basically a reconciliation exercise. Remember, too, if the 1040 seems utterly complicated, that it’s Congress that decides what goes on it, not the IRS.

Lazy Journalists

Martha Stewart was not a “convicted tax evader” who was “forced to pay back property taxes.” Lindsey Vonn was not a “tax cheat.”

Stewart was convicted and jailed for insider trading fraud. However, the celebrity reporters who like to list the “Top Celebrity Tax Cheats” erroneously label her as an IRS tax evader. It was not property taxes and not with the IRS. She disagreed with the state of New York over whether she owed state income taxes. Back in 1994, New York wanted to collect state income tax from her for 1991 and 1992 because she was a resident of New York. She claimed she lived in Connecticut and didn’t spend enough time in New York to be considered a resident. There was a court case. Some of her claims weren’t backed up by sufficient documentation and others were contradicted by evidence, although the state dropped their dispute over 1991. She lost the case about money owed in 1992 and eventually paid $220,000.

In the case of Lindsey Vonn, the pertinent detail that gives a key hint mentions her “estranged husband and coach.” Back in April 2012, a news report surfaced that the IRS claimed Vonn owed more than $1mm from unpaid taxes. You can almost follow the timeline. Vonn won a gold in Vancouver 2010 and went on a lot of talk shows, presumably generating plenty of money from appearances and endorsements. Someone–soon-to-be-estranged husband? business manager?–filed taxes for a joint return in the following spring of 2011, while she was probably out skiing. No one apparently told her what she owed or paid that bill, and in November 2011, she filed for divorce. The next year, April 8, 2012, The Detroit News filed a story that she didn’t pay her taxes. She immediately paid them as of April 12. That’s the definition of a financial oversight. That’s not a tax cheat.

Real Tax Advice: If you owe a surprising amount this year, then immediately review your current paycheck withholding. A third of the year has already passed, and you may still be under-withheld. If you don’t adjust your withholding by lowering your allowances, you could end up owing next year.

Illegal Income

The IRS requires you to report all income, including income from illegal enterprises.

The IRS captured Al Capone mostly because the FBI couldn’t seem to convict him of anything else. According to Wikipedia, it was assistant Attorney General Mabel Walker Willebrandt who reasoned that wealthy criminals who had money to spend but didn’t report it could be prosecuted for failing to report income. When her test case went to the Supreme Court, they rejected the notion that the Fifth Amendment protected you from incriminating yourself by reporting illegal income. The IRS successfully argued that you could report the income as “Other” without specifying exactly how you got it, meaning you don’t have to give details about your drug dealing or extortion that would provide law enforcement details about those crimes. You just have to report the income and pay taxes on it.

In Capone’s case, the details are also curious. Ralph Capone, Al’s brother, was convicted of tax evasion in 1930 and sent to jail. Al ordered his accountants to meet with the IRS to clean up his situation to avoid having the same problem. However, that provided the IRS documentation of unreported income for several years. The government took him to trial based on that evidence. The judge sentenced him to 11 years, and while better lawyers appealed the decision, the Supreme Court let it stand. Capone was taken to a prison in Atlanta but due to accusations of special treatment, he was transferred to Alcatraz so that his cell could entertain thousands of future tourists.

I may eventually have to write something more, just about assistant Attorney General Mabel Walker Willebrandt.

Free Tax Publication: Everything you probably need to know about tax rules is written in Publication 17, downloadable for free at IRS.gov.

Only the little people pay taxes.

Leona Helmsley

The Queen of Mean

Helmsley’s conviction on tax evasion might be the most entertaining of the bunch. Like other famous people we might know, she was notorious for lavish spending that she then refused to pay for. At one point, she decided to remodel her 21-room mansion by adding a dance floor, mahogany and silver furniture, and other items totaling $8 million. She then refused to pay the contractor bills. When the contractors took her to court, they also claimed that she insisted they bill the expenses to her business. Her taxes showed that she was deducting a lot of personal expenses as a business. The cheated contractors had the falsified invoices to prove it.

Tax Advice for the Rich and Mean: Don’t refuse to pay people who you have ordered to commit tax fraud on your behalf.

Tax Evasion Sounds Bad, But so Does Extortion and Bribery

Tax evasion is what eventually took Spiro Agnew, Nixon’s Vice President, down. The U.S. Attorneys had been investigating him for bribes and kickbacks which he took when he was first county executive, then governor of Maryland. Those payments had continued while he was serving as vice president. The original investigation just wanted to look at bribery at the county level, and it was thought Agnew’s participation would have been past the statute of limitations. However, since it continued long afterwards, evidence against him continued to pile up. He eventually accepted a guilty plea of just one count of tax evasion, for failing to report the kickback income for the year 1967, and was sentenced with a fine and probation. He didn’t go to jail, but had to resign the vice presidency. It’s unclear whether he ever filed an amended return for 1967.

Sometimes It Takes Years to Fight the Tax Man

For the Italian Marilyn Monroe, Sophia Loren, the details really illustrate the glacial speed of Italy’s court system. In 1974, the Italian tax authorities claimed she was guilty of evading taxes in 1963. She had earned $180,000 for her work on Vittorio de Sica’s The Voyage, but she argued the money was deferred until a different year. Because she didn’t actually earn it in 1963, she didn’t claim it, and that made her tax rate 60% rather than 70%. That’s what her accountant argued.

The Italian Tax Courts disagreed. She did not return to Italy for ten years because of that (and other reasons), but in 1982, she surrendered to the Italian authorities and went to jail. By then, the accountant who had given the advice had even died. She serviced 17 days out of the 30 day sentence, then was paroled (and presumably paid the fines).

However, in 2013, fifty years after the original tax year in question, the Italian Supreme Court overruled the lower Tax Courts. Her conviction and sentence were erased, and she called it “a miracle of justice.” I suspect she said that ironically.

In the United States, if nothing else catches up with you, the IRS will. On the other hand, if the Italian IRS is wrong, their Supreme Court may eventually catch up with them. It might just take fifty years.

Next Week: new adventures start when I travel across the Atlantic. Look for my new series, Crossing the Pond.