Lifestyles of the Rich and Famous

A Short History of Taxes
1776 — One of the most notorious evaders of British taxes, John Hancock, signs the Constitution in flowing "fuck you" script.
1788 — The newly ratified Constitution forbids Congress from imposing an income tax.
1794 — Alexander Hamilton persuades Congress to impose a 25 percent tax on whiskey "as a measure of social discipline." Farmers on the Pennsylvania frontier revolt.
1798 — Congress imposes a property tax on houses, land and slaves.
1862 — The newly formed Bureau of Internal Revenue collects taxes to finance the Civil War.
1894 — Congress creates an income tax that applies only to the wealthiest 2 percent of Americans. The Supreme Court rules the tax unconstitutional.
1913 — The 16th Amendment authorizes Congress to collect income taxes. Congress sets a base rate of 1 percent but again exempts 98 percent of Americans.
1920s — Republicans push to lower the top rate from 73 percent to 25 percent.
1934 — The Treasury Department goes after its former chief, Andrew Mellon, for evasion. As secretary Mellon had asked the Bureau of Internal Revenue for a memo "setting forth the various ways in which an individual may legally avoid tax." He then used five of the 10 methods on his return.
1942 — "In this time of war, no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000," FDR declares. Congress taxes the middle class for the first time, with rates starting at 13 percent.
1981 — With much hoopla, Congress slashes the top rate from 70 percent to 28 percent, the largest cut in U.S. history. The next year, Congress passes the largest peacetime tax increase in U.S. history.
1986 — The IRS begins requiring Social Security numbers for each dependent. The following year, 7 million "children" disappear.

Myth: You don't have to pay taxes if you buy online
Although many online stores boast that they don't charge sales tax, this actually means only that they don't collect sales tax. In states that have a sales tax, residents are required to pay a "use tax" on any goods they purchase from online merchants (including Ebay), shopping channels, 800 numbers or catalogs located out of state. If you buy something in a state that has a lower tax, you're required to submit the difference. It may be the most ignored tax in the world.

A Day at Tax Court
Commerce Clearinghouse is a Chicago-based firm that provides legal updates to tax pros. Their reporters shared favorite cases:

Pay No Taxes!*
*except if you get caught

Argument: Section 861 of the U.S. Tax Code states that all Americans must pay taxes, but the regulations that led to it exempt everyone who works for an American company.
Why it doesn't work: This argument is the cornerstone of countless "tax honesty" packages that claim you don't have to pay taxes — if you're willing to spend $1000 or more for the details. Last year prosecutors charged one typical cheat, Richard Simkanin, owner of Arrow Custom Plastics in Euless, Texas, with 12 counts of failing to pay $175,000 in taxes and 15 counts of filing fraudulent claims for refunds totaling $234,515. Simkanin says that, because he is a Christian, any official who moves against him will be consumed by fire (it hasn't happened yet). In 2002 a tax court fined a taxpayer $15,000 for making a Section 861 argument and his lawyer $10,500 for presenting it. That same year actor Wesley Snipes asked for a refund of $7.3 million, citing Section 861. He had claimed $18.8 million in income on his 1997 return but signed a new 1040 saying he had actually owed nothing.

Argument: If you're ordained as a minister, you can deduct your income as a charitable donation to yourself.
Why it doesn't work: This is a familiar scam. In one case, in 1984, then-U.S. attorney Rudy Guiliani indicted nine leaders of the Life Science Church, which had raised $10 million selling ordinations. During the investigation Guiliani learned that at least 1000 New York City employees, including hundreds of cops and firefighters, had found religion.

Argument: You don't have to file a return if you make money from illegal activities, because it would violate your right against self-incrimination.
Why it doesn't work: If you're a prostitute or hitman, you can write "Fifth Amendment" in the places where you would otherwise list the source of your wages and your occupation, but not the amounts. This keeps the cops from knowing too much but doesn't stop you from being audited.

Argument: According to the tax code, only residents of "federal" areas-Washington, D.C., Puerto Rico, Guam and other territories, Indian reservations and military bases-must pay income tax.
Why it doesn't work: "This nonsense appears to arise from a tortured reading of the definition for United States, with the cranks going to dictionaries to try to prove that includes means only," explains attorney Bernard Sussman. The includes-only argument also has been used to argue that only federal employees, politicians and corporate officers have to pay taxes.

Argument: The Sixteenth Amendment, which allows Congress to collect income taxes, wasn't properly ratified.
Why it doesn't work: This argument is advanced in The Law That Never Was, a two-volume series sold online for $100 by Bill Benson of South Holland, Illinois. Benson says he visited every state capital and discovered that only four states had ratified the amendment proposed by Congress. The other 33 resolutions had errors of capitalization, spelling or other typos. His smoking gun is a 1913 memo in which the solicitor for the Department of State acknowledges the errors. But a federal court ruled in 1989 that the memo actually settles the matter: "It advised the secretary that he was authorized to declare the amendment adopted," which he did, and "his decision is now beyond review."

Argument: Black taxpayers can claim a deduction as a reparation for slavery.
Why this doesn't work: Nothing in the massive U.S. Tax Code allows for this. Even so, in 2000 and 2001 the IRS received 100,000 returns (including 12 from agency employees) claiming $2.7 billion in reparation refunds. The IRS mistakenly sent out $30 million before realizing what was going on. In 1993 an Essence columnist urged readers to claim a deduction of $43,209, which the writer calculated as the current value of 40 acres and a mule.

Argument: Congress revoked the income tax in 1954, so it's voluntary.
Why this doesn't work: This argument is pushed by Irwin Schiff, twice-convicted tax cheat and author of The Federal Mafia: How the Government Illegally Imposes and Unlawfully Collects Income Taxes. Schiff argues the 16th Amendment was intended only to tax corporate profits, and that the Revenue Act of 1954 omitted the requirement that taxes be "levied, collected or paid." At a hearing last year, a judge indulged Schiff with an hour to outline his legal hodgepodge, then dismissed it as nonsense. The IRS says it has received at least 5,100 zero-income returns from taxpayers who cite Schiff, costing the rest of us an estimated $51 million.

Hard Numbers

$80 billion — gap between what the IRS says Americans owe and what gets paid

$8 billion — amount IRS plans to spend to upgrade its computer system, which dates from the Kennedy administration

$1 billion — value of federal contracts given to American companies that have incorporated in Bermuda to avoid paying U.S. taxes

390,000 — number of refund checks returned to IRS as undeliverable

53-percentage of Americans who pay someone else to do their taxes

7 — width, in inches, of U.S. Tax Code

2.8 million — number of words in code

774,746 — number of words in Bible

195-taxpayers who paid more than they owed in 2001 to reduce federal debt

11 — percentage of Americans who check the little "presidential campaign contribution" boxes on returns

Thinking About Taxes

"I like to pay taxes. They are the price we pay for civilized society." —Supreme Court Justice Oliver Wendell Holmes

"Death: To stop paying taxes suddenly." —Anonymous

"Do senators introduce tax bills because the tax system is a mess? Or is the tax system a mess because senators introduce tax bills?" —Martin Sullivan, Tax Notes

"On my 1040 it says 'Check this box if you are blind.' I wanted to put a check mark about three inches away." —Tom Lehrer

"I'm sick and tired of politicians beating up on the IRS. We have the best and fairest tax-collection system in the world." —Charles B. Rangel

"Dear Mr. President, Internal Revenue regulations will turn us into a nation of bookkeepers. The life of every citizen is becoming a business. This, it seems to me, is one of the worst interpretations of the meaning of human life history has ever seen. Man's life not a business." —Saul Bellow, Herzog

"Old MacDonald had an agricultural real estate tax abatement."-Anon.

"Saul promised that the man who slayed Goliath will receive riches, the king's daughter and exemption from all taxes. Riches is a relative term, and we all know that most women were virtually chattel in the Bible, so it had to be the tax exemption that drove David to risk his life." —Conrad Rosenberg

"I had a guy who wanted to know if he could deduct the cost of his dog food. His reasoning was that his dog was security for his house, therefore the dog food was a security expense." —CPA Frank Howard, to Bankrate.com