Income Tax and the Internal Revenue Service

Income Tax and the Internal Revenue Service
Income Tax and the Internal Revenue Service

Americans have always hated taxes, and although the British less so, there has nevertheless in both countries been a strong resistance to government taxation, combined with demands that any duties be carefully monitored and controlled.

Taxation, of course, lay at the root of the American Revolution, and some “neo-Confederates” still maintain that the tariff, not slavery, was the cause of the Civil War. No tax, however, has been more controversial or provided more fodder for conspiracy theories than the United States Federal Income Tax.

Employed briefly during the Civil War, then eliminated, the income tax made a resurgence in the late 1800s under Populist and other “reform” groups who feared wide disparities in wealth. Henry George’s Progress and Poverty (1879) argued for a “single tax,” and although that was more of a “land tax,” George’s proposal raised the argument that everyone should pay some taxes. In 1894, Congress passed a 2 percent tax on all incomes over $4,000, injecting “class envy” into the taxation process.

The United States Supreme Court ruled all income tax unconstitutional the following year, but that hardly dimmed the Progressive fervor for “reform” of the wealth structure. At the same time, discontent with tariffs—the country’s major source of revenue, replacing land sales in the late 1800s—rose to such a degree that Congress revisited the notion of income taxes.

Tariffs had always been problematic, as they pitted one section of the country against another, but the income tax offered, in theory, a way to make all “equally” bear their share of the nation’s financial necessities.

From the outset, the income tax was “sold” to the public and legislators on the grounds that it would “equalize” the tax burdens borne by the various classes. Indeed, the merits of the tax never involved funding the nation’s activities, but advocates always placed it in the context of egalitarianism and redistribution of wealth. Supporters discovered two central tactics that made the tax even more popular: keep it small (at first) and simple (at first).

However, enacting any income tax required a constitutional amendment, and the Sixteenth Amendment was ratified in 1913 to enable Congress to tax incomes. Early proposals were aimed mainly at “the rich,” with anyone earning less than $3,000 exempt, and those earning $20,000 to $50,000 paying only 2 percent.

The “superrich” (i.e., those with incomes over $500,000) paid only 7 percent, and most Americans, with incomes between $3,000 and $20,000, paid between 0.5 and 1 percent. Moreover, the entire tax form consisted of a single page. The combination of placing the burden on the “rich” and keeping the form simple dramatically reduced (but did not eliminate) opposition to the tax.

Following passage of the Sixteenth Amendment to the Constitution in 1913 as a means to escape the constitutional prohibition on income taxes (which the United States Supreme Court had upheld in 1894), the United States enacted the first permanent, nationwide income tax. At that time, Congress established the Bureau of Internal Revenue then, in 1953 following a federal reorganization, it became the Internal Revenue Service (IRS).

Many continued to resist, though, claiming the tax was unconstitutional. The most famous “tax protestor” is perhaps Irwin Schiff, whose book, How Anyone Can Stop Paying Income Taxes (1982), became a bestseller. Schiff claimed that no one was required by law to sign tax forms, thus no one ever had to pay taxes.

In 1983, the federal government changed the language of the code to address Schiff’s claims, although none were ever upheld in court. Schiff also claimed that people could “refuse” to be audited by the Internal Revenue Service (IRS).

The federal income tax grew quite onerous in World War I, with rates surging to 25 percemt on the lowest tier of payers and 77 percent on the “superrich.” Not surprisingly, tax revenues fell, and when he became secretary of the treasury, Andrew Mellon decided to find out why, investigating the relationship between rates and revenue.

Even though it would not be named the “Laffer Curve” for another fifty years, Mellon discovered the essence of the axiom that at some point lowering taxes actually produces more revenue. He convinced President Warren Harding and Congress to slash tax rates, setting off a boom known as the Roaring Twenties that only ended with the stock market crash in 1929.

Conspiracy theories associated with the income tax include the position that the Sixteenth Amendment was never actually ratified; that taxation is a “front” for support of an international monetary fund in the form of billions of dollars of loans to world banks; and that wages and salaries are the chief source of income for most people, but that it is “not income.”

The IRS, despite several congressional reforms, is still viewed as a font of abuse, partly due to the structure of laws under which it operates. Among some of the abuses documented in Michael Minns’s book, How to Survive the IRS: My Battles against Goliath (2001), were:
  1. Te IRS destroyed legitimate businesses by circulating word during its “investigation” that the company was involved in criminal activity.
  2. roceedings against people who have no money, or ability to pay, as mere “test cases” to send “messages” to “bigger fish.”
  3. Tax preparers sent to jail for forms they had not prepared or even seen.
  4. Arbitrary and political uses of the audit function to silence critics of an administration, or to intimidate proponents of IRS reform. Worse, the IRS “never had to say it was sorry,” in that it was virtually immune from civil suits for wrongful prosecution, nonpayment, or seizure of property.
In addition to these abuses, the IRS conducts its legal proceedings in “tax court,” which lacks most of the protections of civil or criminal trials, making it easier for the IRS to gain a conviction.

Abuses such as these led to the reforms of 1998, which had been based on congressional hearings in which dozens of citizens told horror stories about bankruptcy brought on by wrongful IRS actions, or wrongful incarceration for “nonpayment” of taxes.

The hearings had to provide anonymity to several witnesses from the IRS out of fear that they would be intimidated or punished at work. Nevertheless, the truth came out, and Congress responded, if not enthusiastically.

The resulting reforms, known as the “taxpayers’ Bill of Rights” or the IRS Restructuring Act,
  1. Curbed the IRS’s ability to invoke liens, levies, and seizures of property or income during litigation or investigation,
  2. Limited the IRS’s ability to attach wages or seize property of a spouse, and
  3. Allowed civil damages against the IRS for negligence in collections or unlawful collections.
In addition, the reform provided stronger powers to the citizens’ ombudsman office, strengthened the legal position of individuals locked in battles with the IRS, and in a general sense opened some window of liability to the IRS for abuses against individuals and businesses.

Another area of controversy surrounding the collection of income taxes arose during Prohibition, when “revenooers” sought to close down “speakeasies” on the grounds that they were avoiding taxes. Soon, IRS agents became involved in other Treasury Department activities, such as gun control and tobacco oversight, through the connection to taxation. As is well known, Chicago gangster Al Capone, who was doubtless guilty of multiple murders and general mayhem, was finally arrested and jailed on income tax evasion.

Another element related to IRS conspiracy theories involves the attacks by the agency on tax-exempt churches. During the Clinton administration at least eight churches were targeted for proceedings because they allegedly broke federal tax law. However, most of the churches punished were critical of Clinton, while no audits were conducted of so-called “black” churches that routinely invited Clinton to services for what were, essentially, campaign talks.

But perhaps the largest and most publicized IRS/ church battle involved the Church of Scientology, which won tax-exempt status in 1993 after twenty-five years of “war” between the Church and the IRS. As part of the agreement, the Church had to pay $12.5 million to the IRS.

This marked a victory of sorts against government, but only by an organization whose power is likewise feared by many conspiracy theorists. The Church of Scientology, founded by L. Ron Hubbard, had employed an aggressive campaign of suing the IRS and individual agents for millions, repeating a formula the Church had used against critics who claimed it was a “cult.”

Perhaps of interest also was the timing of the end of the suit against the IRS, not long after Bill Clinton took office, thanks in large part to the support of Hollywood elites such as John Travolta, many of whom are Scientologists.

More recent troubling aspects about the IRS and the income tax for the conspiracy-minded include claims that a massive abuse of the IRS by the Clinton administration occurred in which the IRS audited more than two dozen conservative organizations during Clinton’s second term.

Not only were organizations audited, but numerous individuals who became prominent critics of Clinton, including Paula Jones, Billy Dale, Texe Marrs, David Horowitz, George Putnam, and Linda Tripp, as well as women who had gone public with their affairs with Bill Clinton, such as Elizabeth Ward Gracen. In May 1997, Landmark Legal Foundation began legal proceedings to obtain documents from the IRS to determine if the audits had been politically motivated.

After much legal wrangling, two years later Landmark found evidence that the IRS had indeed audited the Western Journalism Center (a group critical of Clinton) after the Clinton White House forwarded a “complaint” about WJC. The WJC audit was only one of many brought against magazines and journalists (including The American Spectator and WorldNetDaily.Com editor Joseph Farah).

One could take conspiracies involving the income tax and the IRS in virtually any direction, from its role as a conduit for funding “one-world government” to its “illegal” status. The wonder about income tax theories is not that there are so many, but that there aren’t even more.