Although I enjoy looking at billboards on road trips because it breaks the monotony, I don’t pay too much attention to them when I am driving around town. However, one recently caught my eye because it had to do with something I frequently write about: taxes. The billboard said, “Feeling Helpless Against the IRS?”
Since I don’t like handing my hard-earned money over to the federal government, and do so only because I feel helpless against the IRS, I was intrigued by the billboard. I was so intrigued that I turned around and drove by the billboard again so I could read what the rest of it said. The only additional information the billboard provided was a website, which I looked up when I got home. It turns out that the billboard was just an advertisement for a local law firm. The tax attorneys of the firm specialize in “resolving your IRS problems quickly.” Depending on the situation, they can “reduce the amount of back taxes you owe and work out a convenient payment plan, which you can afford.” They strongly recommend that you “enlist the services of a qualified, experienced tax attorney” if you “owe more the $10,000 in IRS back taxes,” “are the victim of IRS collections,” “cannot afford to pay off your IRS tax debt,” or “want to negotiate a settlement with the IRS.”
Although it is certainly true that some Americans feel helpless against the IRS because they owe back taxes, it is just as true that all Americans are helpless against the IRS when it comes to paying taxes in the first place.
Tax facts
From its very beginning, the U.S. tax code has sought to punish higher-income earners with a progressive income tax. Just like the first income tax in 1913, the current income tax system in the United States has seven tax brackets. But any similarity between taxation in the two periods ends with that. The original seven brackets were 1, 2, 3, 4, 5, 6, and 7 percent. The current brackets are 10, 15, 25, 28, 33, 35, and 39.6 percent. And it’s not just the tax rates that have gone up: the income thresholds of each bracket have decreased. One had to make more than $500,000 in 1913 for his income to be subject to the maximum rate. That is more than $12 million in today’s dollars. Now the maximum rate is applied to incomes exceeding $415,050 ($466,950 for married filing jointly). A taxpayer is entitled to a personal exemption of $4,050 for himself, his spouse, and each of his dependents, as well as a standard deduction of $6,300 ($12,600 for married filing jointly). Tax credits and other deductions are also available to taxpayers who qualify. However, certain exemptions, deductions, and credits begin to be phased out as one’s income rises. And the Alternative Minimum Tax ensures that wealthy taxpayers don’t avoid paying their “fair share” by using too many deductions and loopholes.
Capital gains on investments are also subject to being taxed. Short-term capital gains are taxed at the same rate as ordinary income. Long-term capital gains are taxed at a rate of 15 percent for those in the 25–35 percent tax brackets and 20 percent for those in the highest tax bracket. There is also an additional 3.8 percent surtax on net investment income for taxpayers with adjusted gross incomes that exceed $200,000 ($250,000 for married filing jointly). Not even death provides an escape from paying taxes. The estate tax, also known as the death tax, is 40 percent of the value of estates exceeding $5.45 million.
And then there are payroll taxes for Social Security and Medicare. The Social Security tax rate is 12.4 percent (split between employer and employee) on the first $127,500 of income. The Medicare tax rate is 2.9 percent (split between employer and employee) on every dollar of income. Thanks to health-care-reform legislation passed in 2013, there is an additional Medicare tax of .9 percent that applies to income (including non-cash fringe benefits and tips) in excess of $200,000 ($250,000 for married filing jointly).
Americans are helpless against the IRS when it comes to paying their taxes. Tax withholding only makes things worse. Most Americans are not self-employed. They work for businesses that are required to withhold income tax and social-insurance taxes from their paychecks. The amounts withheld for Social Security and Medicaid are a fixed percentage. And while one can claim an excessive number of exemptions on his W-4 form to reduce the amount of income tax that is withheld, any tax owed still has to be paid at the end of the year. And there are penalties for not having enough money withheld from one’s paycheck.
Corporations are also subject to income tax — at a maximum rate of 35 percent — which, of course, is ultimately borne by shareholders through lower dividends and share prices, passed along to consumers through higher prices, and paid by employees in corporations in the form of lower wages.
According to the Office of Management and Budget, the IRS collected $3.268 trillion in taxes from Americans in fiscal year 2016 (with a budget of $11.235 billion to do the collecting). In fiscal year 1961 (when John Kennedy was elected president), the federal government collected about $94.388 billion in taxes. According to the Census Bureau, the population that year was about 183,691,481. That means that federal tax revenues equaled about $514 per capita (about $4,121 in 2016 dollars). Federal tax revenues were about $10,114 per capita in fiscal year 2016. That means that real federal taxes per capita have more than doubled since Kennedy was elected.
When you add in other federal taxes that Americans pay (e.g., excises taxes on gasoline and alcohol), the federal government will shake down Americans for about $3.5 trillion in 2017. And according to the Tax Foundation, if you add to that the $1.6 trillion in state and local taxes that Americans will have to pay, “Americans will collectively spend more on taxes in 2017 than they will on food, clothing, and housing combined.” Tax Freedom Day fell on April 23 this year. That means that Americans as a whole had to work the first 113 days of 2017 in order to pay the nation’s tax burden.
IRS power
Because the majority of the taxes that Americans pay are to the federal government, and because of the power, and firepower, of the IRS (it was reported last year that the IRS had spent nearly $11 million on guns, ammunition, and military-style equipment for its special agents since 2006), it is no wonder that Americans feel helpless against the IRS.
The penalty for not paying your federal income tax on time is 5 percent of your balance due per month (or part of a month) that a return is late, not to exceed 25 percent of your unpaid taxes. Interest (compounded daily) starts accumulating on unpaid taxes one day after they are due until they are fully paid off. The current interest rate is 4.18 percent. And now, beginning in the spring of 2017, on the basis of a law passed at the end of 2015 that had nothing to do with taxes (the Fixing America’s Surface Transportation Act, which provided long-term funding for transportation projects), the IRS will once again be using private debt-collection companies to collect delinquent taxes. In Section 32102, “Reform of rules relating to qualified tax collection contracts,” the IRS is required to use private debt-collection companies to collect “inactive tax receivables.” These are defined as any tax debt that has been:
- removed from the active inventory for lack of resources or inability to locate the taxpayer;
- for which more than 1/3 of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or
- for which, a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection.
The private collection agencies are required to follow the provisions of the Fair Debt Collection Practices Act and “must be courteous and must respect taxpayer rights.”
Too bad the IRS is not always courteous and respectful of taxpayer rights, especially toward those businessmen who deposit large amounts of cash. The Bank Secrecy Act, a federal law enacted in 1970, requires banks to report any deposits, withdrawals, or transfers of more than $10,000. The law was supposed to make it easier for the government to track drug dealing, money laundering, illegal gambling operations, and other crimes in search of victims because of the likelihood that the money in question was escaping taxation. Although the law has been revised several times, the $10,000 figure has not been adjusted for inflation. But the Bank Secrecy Act also requires banks to report to the government any activity that might be construed as structuring deposits to avoid the reporting requirement. According to the IRS, “Structuring is the practice of conducting financial transactions in a specific pattern calculated to avoid the creation of certain records and reports required by the Bank Secrecy Act (BSA) and/or 26 USC 6050I (Form 8300).” An example would be making a series of deposits of cash of less than $10,000 instead of making one cash deposit of more than $10,000.
According to a 2015 report by the Institute for Justice, the IRS seized more than $242 million for the non-crime of structuring from more than 2,500 cases between 2005 and 2012. At least one-third of the seizures “involved no other suspicions of criminal activity, aside from making cash withdrawals or deposits under $10,000.” In 2012, armed IRS agents descended on a dairy farm in Maryland owned by Randy Sowers and announced that “the agency had seized over $60,000 from the farm’s bank account” and “served him with a grand jury subpoena, raising the possibility that Randy and his wife could face criminal structuring charges.” Feeling helpless against the IRS, they took a settlement deal and “agreed to forfeit $29,500 to the government.”
In 2013, armed IRS agents and a U.S. marshal raided a family bakery in Connecticut after seizing more than $68,000 from the bakery’s bank account. It turns out that the owners of the bakery, the Vocaturas family, which for almost its entire history has been “operated primarily as a cash business,” had engaged in the non-crime of making “a series of cash deposits under $10,000.” After three years, the government offered two of the family members an outrageous plea deal: forfeit the seized cash, serve 46 months in prison, and give up $160,000 in personal assets. They declined the deal. In retaliation, “the IRS slapped the family with a grand jury subpoena, demanding eight years of bank statements, state and federal tax returns, payroll records, invoices, receipts and numerous other financial records.” It took a motion filed by the Institute for Justice before the IRS agreed to return the seized cash and withdraw its grand jury subpoena.
The IRS has the power to garnish your wages if you owe a tax debt. But unlike most other creditors, the IRS can do so without first getting a judgment against you. And the IRS can take more than what regular creditors are allowed to take. Although the amount that most creditors can take from your wages is limited by law, the IRS takes all but what it deems necessary for you to pay for basic living necessities. The IRS can also seize — without first getting a court order — not only your bank account, but also your home, business, and vehicles to satisfy a tax debt.
It’s no wonder that Americans feel helpless against the IRS.
Tax reform
To end or reduce this helplessness, some people, mainly conservatives, see the answer in reforming the tax code, especially its complexity. After all, even Albert Einstein is reputed to have said that “the hardest thing in the world to understand is income taxes.” Nearly every tax-reform proposal has as its main focus simplifying the tax code by reducing the number of tax brackets, deductions, and credits; moving to a flat tax with few or no deductions; or switching to a national sales tax. The idea is that making the tax code less complex will mean that Americans can more correctly figure their taxes, more easily pay their taxes, and have less chance of any interaction with the IRS. Lowering Americans’ overall tax burden is almost an afterthought.
Donald Trump has proposed reducing the seven tax brackets to three tax brackets of 10, 25, and 35 percent, doubling the standard deduction, providing tax relief for families with child- and dependent- care expenses, eliminating targeted tax breaks that mainly benefit the wealthiest taxpayers, repealing the Alternative Minimum Tax, repealing the estate tax, repealing the surtax on net investment income, and lowering the corporate income tax rate. House Republicans, conservative think tanks, and Trump himself have previously introduced similar tax-reform proposals.
Conservatives have for years touted the idea of a flat tax that would tax all income (usually with the exception of capital gains, Social Security benefits, interest earned, and dividends received) at a flat rate (there is no consensus on the rate) with generous personal and dependent allowances but greatly reduced (or even eliminated) tax deductions and credits. Some plans retain the refundable Earned Income Tax Credit. Social Security and Medicare taxes would remain as they are. Flat-tax supporters often talk about the simplicity of Americans’ filing their taxes on a postcard and claim that there would be no more need of an IRS.
One tax reform proposal that seems to have died down is the FairTax, a national sales tax of 23 percent (which actually ends up being 30%) on the final sale of all new goods and services. All new goods — including cars, houses, prescription drugs, and food — and all services — including surgeries, funerals, rent, and haircuts — would be subject to a national sales tax. This tax would replace the personal income and corporate income taxes, capital-gains tax, estate tax, Social Security tax, and Medicare tax. It would also pay out a monthly “prebate” to offset the taxes paid on basic necessities. Fairtaxers often claim that their plan would eliminate the IRS.
Abolish the IRS
There is no question that the federal tax code is too long, too complex, too intrusive, and too confusing. It is reported every year by financial magazines that a fictional tax return given to twenty or thirty tax preparers results in twenty or thirty different calculations of the correct amount of tax due. But will shrinking and simplifying the tax code mean that the power of the IRS will be greatly diminished?
The problem with all of the proposals to reform the tax code is the same: there will still be an IRS to ensure that taxes are collected and deposited into the U.S. Treasury. Claiming that the IRS will be eliminated is disingenuous. Renaming the IRS doesn’t change anything. And neither does relocating the IRS in the Treasury Department. Even with tax “reform,” if taxes are to be collected, there are a number of things that will still exist. There will still be tax laws. There will still be IRS bureaucrats. There will still be IRS agents with badges and guns. There will still be penalties for non-compliance. There will still be federal courts to try tax evaders. There will still be laws against structuring. In other words, Americans will still be powerless against the IRS.
Without those things, government mandates that Americans pay their taxes are merely suggestions. Without them, no one with any sense would bother to pay his taxes no matter how short the tax code was, no matter how “fair” the tax was, no matter how simple the tax forms were, no matter how few tax brackets there were, and no matter how low the tax rates were. Those who did pay would merely be making donations to the U.S. Treasury.
The only way to really stop Americans from feeling helpless against the IRS is to completely abolish the agency in its entirety and let every last one of its employees join the ranks of the unemployed. Those are layoffs that many Americans would cheer. The problem is that, for more than a hundred years, most Americans have been conditioned to believe that the IRS is a necessary evil because “taxes are the price we pay for civilized society,” as Supreme Court Justice Oliver Wendell Holmes wrote in a dissenting opinion in 1927. Yet, we certainly had a civilized society throughout the United States when Americans had no income tax, no capital gains tax, no Social Security tax, no Medicare tax, and no estate tax. The problem is that now the government “needs” the money because it has become a massive welfare/warfare state. But the actual constitutional functions of the U.S. government (which are “few and defined” — to use the words of James Madison) could be funded by tariffs, lotteries, donations, and fees. The government was funded primarily by tariffs before the income tax was instituted. Only the states of Alabama, Alaska, Hawaii, Mississippi, Nevada, and Utah don’t have lotteries. The Bureau of the Fiscal Service already receives cash and gifts donated to the government to reduce its debt — almost $3 million was given last year. And according to 31 U.S.C. §9701, federal agencies are permitted to “charge for a service or thing of value provided by the agency.”
End helplessness. Abolish the IRS.
This article was originally published in the September 2017 issue of Future of Freedom.