Eight Tax Myths – Lessons for Tax Week

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We welcome guest blogger Bryan Camp. Bryan is the George H. Mahon Professor of Law at Texas Tech School of Law. Bryan is a prolific and engaging writer. We worked together at the Office of Chief Counsel, IRS for several years where I had the pleasure of watching fellow bureaucrats react to his wonky writing. This is the first of a three part series dispelling common myths about taxes and the tax system. Perfect reading for the week we perhaps think most about the American tax system. Keith

This post originally appeared on the Forbes PT site on April 13, 2015.

The Tax Code is a puzzle. Whether one views it as an engaging enigma or a ridiculous riddle, everyone has to deal with it and with the agency that administers it: the IRS. And an IRS letter in your mailbox cannot help but bring feelings of dread, even if the contents turn out to be a refund check. It is not surprising then, to find more than a few myths about the income tax and the IRS in our popular and political culture. Here are some of them.

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1. The Income Tax Started in 1913.

One common myth is that the income tax started in 1913, after passage of the 16th Amendment to the Constitution. For example, Judge Boasberg, a highly educated federal judge in the prestigious U.S. District for the District of Columbia, recently wrote in one of his opinions: “…the casual student of history knows that the Sixteenth Amendment authorizing the modern federal income tax was not ratified until 1913.”

Forget 1913. The watershed year for the modern income tax in the United States was 1862. That was when, in desperate need of revenue to fund the Civil War, Congress passed a revenue act of unprecedented scope and complexity. Before then, the federal government had raised its revenue from external sources via customs duties, or tariffs, on imports. But the Revenue Act of 1862 did not just toy with tariffs. It created a vast number of brand-spanking new taxes imposed on those within the United States, thus generating “internal revenue.” Most of the taxes were excise taxes—taxes on the production or consumption of myriad articles of commerce, everything from candles to cloth to pickles. Birthed along with this welter of new excise taxes, however, was a new kind of tax called the income duty. It was just the runt of this litter; private compilations of the tax laws published over the next several years did not even have “income” in their titles. Few foresaw how big that runt would grow or how much of the 1862 statutory language would still be operative over 150 years later, embedded in the current Tax Code.

This newfangled income duty was so successful in raising revenue that Congress kept renewing it until 1872, seven years after the Civil War ended. And Congress revived it again in 1894. It was then opponents raised a question about whether a tax on income was a “direct tax” within the meaning of the U.S. Constitution. If it was, then Congress would have to apportion the revenue among the states, a political death blow to any tax. In 1894 the Supreme Court dealt the blow in Pollock v. Farmer’s Loan, where it decided that a tax on income received from rental property was a “direct tax.” Note this did not make the tax unconstitutional, it just made the tax unconstitutional without apportionment.

That is what the 16th Amendment was all about: removing the apportionment requirement, not authorizing the tax itself. Even before the 16th Amendment Congress doggedly kept writing income tax laws. In 1909 Congress started taxing the business income of corporations, and the Supreme Court held that was not a direct tax and so was not subject to apportionment. In 1912, based on the success of the 1909 legislation, the House Ways and Means Committee approved a draft bill to impose a similar income tax on the business income of individuals. The Committee Report contains a lengthy analysis of why that version of an income tax would survive a constitutional challenge. The passage of the 16th Amendment, however, obviated the need for such legerdemain and so instead of a new “excise” tax, Congress simply tacked an income tax provision onto the 1913 Underwood Tariff Act, much as it had tacked the income duty on the revenue bill back in 1862.

2. The “IRS Code.”

Another common myth is about something called the “IRS Code.” For example, Ted Cruz routinely claims “there are more words in the IRS Code than in the Bible.” The line gets a lot of laughs even though the comparison makes little sense. The Spanish Inquisition, Crusades, and French wars of religion involving the Huguenots should be proof enough that fewer words bring little advantage when it comes to clarity, fairness, or social acceptance.

There is no “IRS Code.” Since 1926 the federal tax laws have been arranged by subject matter in a compendium called the United State Code, or “US Code.” Each subject gets its own title number. So, for example, you can find all the bankruptcy statutes collected in Title 11, also known separately as the “Bankruptcy Code.” And you find all the federal tax laws compiled in Title 26, also known separately as the “Internal Revenue Code” or “IRC” or “Tax Code.” All of those are quite acceptable shorthands. But “IRS Code” makes no sense. The IRS is the agency that administers the Tax Code. It is stuck with the same tax laws that you and I are stuck with, laws enacted by Congress and signed by the President.

So why does Cruz use the term “IRS Code”? After all, he went to Harvard Law School. He knows better. Pronouncing “I-R-S Code” also takes more syllables than saying “Tax Code.” So it’s not a short cut.

The most likely reason is political. The term is a convenient mash-up that attempts to associate responsibility for the tax laws to the agency that administers them. Saying “IRS Code” implies that the IRS is responsible for the tax laws, that the IRS wrote the words of the statutes. Hate one, hate both. By using the term, Cruz can blame the agency for all the words in the Code when the reality is that Congress—where Cruz sometimes works—is responsible for the verbiage, however excessive one believes it to be.

Other politicians are more honest about the matter. For example, in a February 3, 2015, Senate Finance hearing, Senator Orrin Hatch candidly acknowledged to IRS Commissioner John Koskinen (during minute 42 of the hearing video) that “the length of the tax laws have more than tripled since 1975…We should not blame you for this. Congress is the one that keeps adding to your growing responsibilities.”

So, please, the next time you hear the term “IRS Code,” ask yourself whether the person using that term is being ignorant or manipulative. Those are the only two reasons for using the term.

3. Income Taxes are Self-Assessed.

One of the most common myths is that our tax system is based on self-assessment. Not to pick on the good Judge Boasberg, whom we met in looking at the 1913 myth, but in that same court opinion, he buys into this myth as well, declaring “our system is basically one of self-assessment,” a phrase he actually takes from this IRS regulation! Heck, if the IRS says so, why is this a myth? Well, the very next sentence of the regulation shows why: it explains that each taxpayer “is required to file a prescribed form of return which shows the facts upon which tax liability may be determined and assessed.” And who does that assessment? Why, the IRS.

Our system is not one of “self-assessment.” I don’t care who is propagating this myth, whether it’s a judge, a politician, or the taxing agency itself. They are just wrong. Wrong as a matter of law. Wrong as a matter of fact.

As a matter of law, our system is not one of self-assessment. It is a system of self-reporting only. Section 6201 of the Tax Code tells us who makes the assessment and it does not say “the taxpayer shall assess” or “the taxpayer shall self-assess.” It says, “the Secretary shall assess.” Section 6203 explains that the assessment “shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.” It does not say the assessment is made “by the taxpayer in accordance with forms, rules or regulations prescribed by the Secretary.” If, somehow, the proper IRS official does not sign the proper document, then there is no assessment for the IRS to collect, regardless of what the taxpayer submitted on his or her return. Taxpayers have actually won in court when they submitted returns that were not then properly assessed, sometimes to the tune of multiple millions of dollars in lost taxes. If our system were, truly, a system of self-assessment, those cases would never happen.

Nor is our system is one of self-assessment as a factual matter. It is more accurately described as a system of coerced self-reporting, as anyone who received an erroneous W-2 or 1099 will attest. It is true that the IRS accepts a high percentage of taxpayer returns as filed and records the tax liabilities reported on those returns. This might lead one to believe the system is one of self-assessment de facto if not de jure. To understand why that belief is wrong one must first understand that assessments, are not ministerial actions but are discretionary actions, as seen in the case law: they reflect a judgment of what taxes are owed. In fact, the IRS does not have to make an assessment; it could choose to instead file suit in federal court. Go read §6501(a) of the Tax Code, the statute of limitations on assessment. Did you ever stop to ask why it reads that the IRS must either assess or bring proceedings in court without assessment within three years after the return is filed? It is because an assessment is an administrative judgment of taxes owed, which triggers administrative collection powers; it is an alternative to the IRS filing a complaint in court and obtaining a court judgment.

So while taxpayers file returns, they do not assess their own taxes. Nor does the IRS blindly accept returns as filed and assess taxes based on whatever the taxpayer puts on a return. But more on that tomorrow, when we get to Myth #5.

 

Comments

  1. Unfortunately, Professor Camp has strayed from his “wonky writing” style, which I tend to enjoy. Part I of his series here, though, is pure…camp.

    The Professor derides those who incorrectly refer to “the IRS” Code. But how does he describe that Code, in his post’s first words? As “the Tax” Code. If one who describes U.S. Code Title 26 as “the IRS” Code wrongly implicates the IRS, then one who describes that same title as “the Tax” Code” wrongly implicates the income tax as our sole federal tax. Can one who uses the phrase “the Tax” Code be either “ignorant” or “manipulative?”

    Professor Camp also declaims against the Spanish Inquisition, the Crusades, and the French religious wars. I would therefore credit him as an expert on Christianity’s excesses except for one thing: he gets the year of the first federal income tax wrong. Congress did not enact the first federal income tax in 1862. Rather, it first enacted the income tax in 1861. 12 Stat. 292, Chapter XLV, § 49. To paraphrase the Professor, forget about 1862.

    I would add three tax myths to Professor Camp’s list:

    One myth is the Professor’s statement that the Constitution’s apportionment requirement would fell a “political death blow to any tax.” Apportionment applies only to direct taxes, not to “any” tax. And the political process creates direct taxes. In fact, in 1798, 1812, 1815 and 1861, Congress laid and collected direct taxes. No “political death blow” followed.

    A second tax myth is Professor Camp’s description of the 16th Amendment as being “all about” removing the apportionment requirement with respect to the income tax. But the 16th Amendment did not change the original Constitutional requirement that Congress must apportion ALL direct taxes. Instead, the 16th Amendment merely removed consideration of an income source from a determination of whether the income tax, as applied, is a direct or an indirect tax. Removal of income source consideration allowed for the income tax to be exempt from the apportionment requirement. Nonetheless, Congress must still impose the income tax under the Constitution’s Uniformity Clause. If it does not do so, then the tax is unconstitutional as a direct tax, irrespective of the 16th Amendment.

    Another myth is the Professor’s observation that “[e]ven before the 16th Amendment Congress doggedly kept writing income tax law.” Despite Professor Camp’s contrary statement, Congress in 1909 never “taxed the business income of corporations.” What Congress did in 1909, in The Corporation Excise Tax Act, was to tax the privilege of doing business in a corporate form; the tax amount imposed on that privilege being determined by the corporation’s net income. The Act may or may not have been legislative sleight-of-hand—but it did not impose an income tax.

    A final myth (for present?) is Professor Camp’s pronouncement that the income tax is not based on self-assessment. He tells us that our income tax system is really one of “self-reporting only” and points us to §§ 6201 and 6203 as proof because neither mentions a taxpayer’s self-assessment. But another law does:

    “26 U.S.C. § 6702(a)
    A person shall pay a penalty of $5,000 if-
    (1) such person files what purports to be a return of a tax imposed by this title but which-
    (A) does not contain information on which the substantial correctness of the self-assessment may be judged, or
    (B) contains information that on its face indicates that the self-assessment is substantially incorrect…”

    How the above two statutory self-assessment statements are “wrong as a matter of law,” perhaps the Professor will later inform the many tax defiers who have suffered, or will soon suffer, the § 6702 exaction. Undoubtedly, that daring group would love to hear Professor Camp explain how they can successfully overcome the $5,000 penalty because there is no “self-assessment.”

  2. Anonymous says

    Dear Mr. Camp,

    Regarding 6201: “(1) Taxes shown on return – The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title.”

    Is the aforesaid “determination” the same as the aforesaid “assessment”? If not, then what factually-renders a “determination” different from an “assessment”?

    Thanx … Chris

    • Bryan Camp says

      Hi Chris, Good question. 6201 is what gives the Secretary the authority to accept returns as filed as the basis for the assessment. That’s the meaning of the language “determined by the taxpayer or by the Secretary.” Section 6203 is the section that tells you what an assessment it. It’s the act (by the Secretary) of recording the liability…as determined by the taxpayer or the Secretary.” So 6201 gives the IRS the discretion to accept returns but does not say that taxpayers self-assess. I go into this in more detail on just this point in a Tax Notes article “Loving Return Preparer Regulation” which you can find here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2306020. The point in this blog is a summary of that part of that article.

      • If § 6201 does not say that taxpayers self-assess their tax liabilities, neither does it give the IRS “discretion to accept returns.”

        In any event, § 6203 does describe an assessment as a “recording of the liability” that § 6201 says is “determined by the taxpayer or by the Secretary.” But that proves what exactly? Only that the taxpayer determines his liability and the Secretary records the liability that the taxpayer determined.

        If the Secretary’s liability recording is an “assessment”, which § 6203 says it is, then why isn’t the taxpayer’s determination of that recorded liability a “self-assessment,” which § 6702(a) (twice) says it is? The Professor’s agitation about this issue arises because he improperly conflates an assessment with a self-assessment, which the law recognizes as two different events.

        The following three-step process should help:

        Question:
        Which comes first, the taxpayer’s liability determination or the Secretary’s liability recording?

        Answer:
        The taxpayer’s liability determination, i.e. his self-assessment expressly recognized by § 6702(a).

        (Proper, But At Least Not Illogical) Conclusion:
        The federal income tax is BASED ON self-assessment.

      • Dear Mr. Camp,

        1. I read the first 6 pages of your article with interest. The manner in which the Executive changed the meaning (= expanded powers) of the Legislature is quite disturbing to me. Do you consider the Executive’s declaration of powers not specifically granted by the Legislature a violation of American founding principles of government? You called it “legal logic” when “there had been no explicit congressional statute”. Isn’t that the definition of “overreaching”? Isn’t overreaching illegal and morally wrong? Wouldn’t America’s founding fathers call it tyranny to do such a thing?

        2. What’s the significance of “recording” the assessment in the “record”?

        Thanx … Chris

  3. Anonymous says

    Dear Mr. Camp,

    Regarding 16A & “the rule of apportionment”:

    1.2.3: Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers, which shall be determined by adding to the whole Number of free Persons, including those bound to Service for a Term of Years, and excluding Indians not taxed, three fifths of all other Persons.

    1.9.4: No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.

    16A: The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

    Based on your hypothesis that 16A removed the “apportionment requirement” from the income tax (which you claim to be a direct tax): Doesn’t 16A create a “conflict of law” between with 1.2.3/1.9.1, since “income taxes” (purportedly) do not require “apportionment”, whereas the fundamental law say they do?

    If you’re right, then how does you resolve the apparent “conflict of law”?

    Thanx … Chris

    • Bryan Camp says

      Sorry, Chris, I’m not sure I follow you here. First, I don’t claim the income tax to be a direct tax. Not sure where you got that from! Second, why are you puzzled that a later amendment to the Constitution overrules an earlier part of the constitution? For details on the apportionment issue and how it got into the Constitution in the first place, Cal Johnson at U. Texas is the expert on the apportionment question and I recommend his book Righteous Anger at the Wicked States: The Meaning of The Founders’ Constitution, Cambridge University Press ISBN: 0-521-85232-3 .

      • Chris’s point appears to be that the 16th Amendment did not, as you now clarify, Professor, “overrule[ ] an earlier part of the constitution.” He seems to say that only if one believes the income tax is a direct tax could he then conclude that the 16th Amendment “overruled” the two direct tax clauses.

      • Dear Mr. Camp,

        1. In your opinion, what is the term the federal constitution uses to identify the type of tax that the federal individual income is?

        2. Also, I am puzzled over the conflict in statements between 16A (= it removed the apportionment requirement on the tax), and 1.2.3/1.9.4. This is what confuses me:

        a. I’m under the impression that only direct taxes require “the rule of apportionment”, whereas only indirect taxes require “the rule of uniformity”. Is that in line with what you believe to be true? If not, then please clarify.

        b. If only direct taxes require apportionment, then when you claim that 16A removed the apportionment requirement from the 16a tax, the logical presumption is that 16A refers to direct taxes (b/c apportionment is involved).

        c. If, as you say, 16A does not refer to direct taxes, then where in the federal constitution is apportionment required on other than a direct tax?

        d. If the 16A tax is not a direct tax, then how can the apportionment requirement apply to it?

        3. If 16A tax is not a direct tax, then why even mention the apportionment requirement in the wording? In such a case, the Amendment would be deliberately written unclearly to confuse, instead of being written plainly to be understood by the common man who reads the newspaper. OR, something else is going on here that need clarification.

        So what’s your opinion on all this?
        Would you kindly answer my questions in order?

        Thanx! … Chris

        • Also, I forgot to add this:

          From my studies, I discovered that when the constitution is amended, the parts of it which conflict w/the amendment are stricken and rewritten. So, for 2 constitutional texts to co-exist in contradiction of each-other is a violation of the document. I believe this is well-stated by the Supremes t/o judicial history. I also believe it is in keeping w/the canons of statutory construction. If you think I’m mistaken, please correct me.

          Thanx! … Chris

        • Anonymous says

          Dear Mr. Camp,

          I also forgot to ask you this question:

          I have the impression that the federal constitution grants the federal government only 2 kinds of taxing powers: direct and indirect.

          Are you in agreement with that proposition?

          If not, then what other kinds of taxes does the federal government have power to levy under the constitution, and what words in the constitution identify those taxes.

          I am keenly interested in your opinion on this question.

          Thanx … Chris

  4. I hope Professor Camp will also remember to tell us about Myth No. 4.

  5. Lysander Venible says

    Concerning “self-assessment” I would certainly agree that a tax return is not a “self-assessment.” The cited Cohen v Meyer case is clear on that as well. But you will notice that the Cohen court, referring to the secretary’s assessment said “It does not create the tax liability, but it does act as a judgment for taxes found due.” Putting aside for a minute the defects of such a due process free “judgement,” the question that comes to mind would be, “If not the assessment, what does create the liability?”

    The answer to that question it that the tax return does, in its role as a “Statute Staple Contract.” See Murray’s Lessee, 59 U.S. 272, at 277, and G.M Leasing.

    It is common knowledge that there is no liability statute for Subtitle A income taxes, notwithstanding the fed’s attempt to create one by using a regulation to expand the statute in sec. 1.1.

    I have seen the Commissioner ignore requests to determine a tax based on honest, properly sworn, complete statements of revenue that meet all elements of the Beard test, but that for lack of knowledge make no tax determination.

    These requests ask instead that the Secretary certify a determination and assessment of tax based on the facts and figures stated in the request. The Secretary never does make that determination, (or at least he hasn’t in the two years I’ve been aware of these requests) though the requests often generate an orgy of artfully vague, evasive, and occasionally threatening correspondence.

    One must ask, “Why can’t or won’t the Secretary determine and assess a tax if he has all the properly sworn information he needs to do so?”

    It would seem to indicate that the Secretary cannot “determine and assess” a tax until the citizen declares himself liable by filing a Form 1040. And he cannot use sec. 6020b to do so because the filer has not “failed to file.”

    Therefore, Mr. Camp is correct that a tax return isn’t a “self-assessment.” It’s a self declaration of liability, made in ignorance by taxpayers who are unaware of the artfully ambiguous defined “terms” in the Code. I’ve downloaded Mr. Camp’s Florida Bar “Inquisition” article and look forward to spending some time with it.

    • Bryan Camp says

      Hi Lysander,

      Actually, the tax liability arises automatically at the close of the tax year. For most of us mortals that’s the end of the calendar year as well. You can see how this plays out in a case called Ewing v. U.S., 914 F.2d 499, 502-03 (4th Cir. 1990), cert. denied 111 S. Ct. 1683 (1991) (rejecting taxpayer’s argument that, prior to assessment, there can be no tax liability and therefore no “payment” of taxes). You can find that here: http://openjurist.org/914/f2d/499/ewing-v-united-states

      That distinction, between the tax liability and the assessment of the liability, is a tough one to wrap one’s brain around. What the assessment does is allow the IRS to start administrative collection action. If the IRS did not assess, it would have to file suit in court and get a court judgment before it could collect. That is pretty slow and expensive, so allowing the IRS to make the assessment instead of a court is a short-cut. Court review is then on the back-end of the process instead of the front end.

      I am delighted you intend to read the Inquisition article where I go into all of this in more detail. Be warned, however: it’s about 160 pages long. And while one reader did tell me it was a “page-turner,” I strongly suspect he was joking… .

  6. Anonymous says

    Mr. Camp,

    Did you mean the “‘Loving’ Return Preparer Regulation” paper?

    The one I downloaded is only 13 pages.

    … Chris

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