The story we’re usually told goes like this: The tax system is paying for things that make society function, and paying them is a good thing, since we all want those things to function. Taxes redistribute money to those in need, so paying them is practically a duty. When you don’t pay taxes, you’re not only a disloyal citizen, but also subject to the long arm of the law in the form of IRS harassment.
This narrative only tells part of the story. Tax money finances public spending, but what the government spends tax dollars on isn’t necessarily what’s needed for a healthy society. The most obvious example is the expansion of the military-industrial complex; the War Resisters League estimates that 47% of the total budget, or $1.355 trillion per year, goes to current military spending and debt service payments on past military spending. Tax dollars also fund the state, local, and federal police forces and prison systems that oppress so many of us. Nationwide spending on prisons was $50 billion in 2011, contributing to the serious budget crises states have faced since the global recession of 2009. Very often, our tax dollars go toward paying the government to enact violence on people in the United States or in other countries.
Less dramatic examples exist as well. The tax system isn’t just about taking money from point X and moving it to point Y—it’s also about regulating the economy more generally by allocating government support to certain industries over others. At the local level, city governments often give tax abatements for condo development, meaning that city residents collectively subsidize this kind of housing over more sustainable or affordable options. Implicit in these policies are decisions about what’s best for the public. It sounds good on paper, but in reality, private interests often strongly influence government decisions, resulting in subsidies for private development projects that benefit a narrow part of the population while the rest foot the bill.
In this chapter, we’ll look at taxes as a system of debt that often worsens problems in our society while claiming to fix them. We’ll explore the history of tax resistance in United States, suggest practical means to pay less in taxes, and provide advice for defaulters.
The U.S. tax system is regressive, meaning that poor people pay a higher proportion of their income in taxes than wealthy people. Taking into account all state, local, and sales taxes, the Institute on Taxation and Economic Policy 2013 report “Who Pays?” concludes:
The main finding of this report is that virtually every state’s tax system is fundamentally unfair, taking a much greater share of income from middle- and low-income families than from wealthy families. The absence of a graduated personal income tax and the over reliance on consumption taxes exacerbate this problem in many states. Combining all of the state and local income, property, sales and excise taxes state residents pay, the average overall effective tax rates by income group nationwide are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top 1 percent.
When everyone is required to pay taxes, having to pay less is certainly a benefit. Many tax rules systematically favor the wealthy; one obvious example is the fact that capital gains (taxes on the sale of investments) are often taxed less than wages. The 2013 “Fiscal Cliff” deal raised the capital gains tax rate from 15% to 20%, still leaving it below the wage tax rate applied disproportionately to low-income brackets. This glaring unfairness in the tax system appears when a secretary pays a 33% tax rate compared to their boss, whose net worth might be $50 billion and pays a mere 17.4% of their income in taxes.
Even if everyone followed these rules, the system would still be unfair. But not everyone follows the rules, and those doing the biggest cheating are wealthy individuals and large corporations, among whom tax avoidance is common and widespread.
A look at who benefits from the tax debts that have been shifted onto the shoulders of individuals lends a more expansive view of how the government interacts with and regulates the economy. Over the last thirty years, the government has implemented neoliberal economic policies, which generally include the push for privatization of public services, lower wages for the majority of workers, and loosening restrictions on businesses.
“Corporate welfare” is the term used to describe these government policies that use tax revenues to support businesses in direct and indirect ways. Some examples include low-cost leases to energy companies that drill on public land, the bank bailout of 2008, and price support for large agribusiness in the Farm Bill. On the local and state level, corporate welfare can be seen in the numerous tax-breaks Walmart has received for new construction. Additionally, corporations benefit from public spending on the services that make their business possible, such as transportation networks, and publicly funded research and development.
The tax preparation industry
The withholding of federal taxes from paychecks throughout the year can be difficult for many who live paycheck to paycheck. During tax season, when a sizeable portion of that money is often returned all at once, tax preparation companies take advantage of one of the few times during the year when working families have a chunk of extra income.
Until 2013, tax preparation companies offered refund anticipation loans (RALs) to those for whom they had prepared taxes. Upon receiving confirmation from the IRS that the taxpayer didn’t have any back taxes or liens, they would loan the expected refund to the taxpayer in advance, after assessing a fee for this service in addition to a fee for tax preparation. These loans would average 150% APR, and sometimes as high as 400%, on par with the predatory payday loan industry.
The tax preparation industry’s promises of “Quick Cash” and “Instant Refunds” generally targeted poor communities and communities of color, like many other high-interest financial products offered by the fringe finance industry (see Chapters Seven and Eight). The consequences for many families are steep; in 2010, taxpayers paid an estimated $338 million in fees for these predatory loans.
Now that changes to the IRS code have done away with refund anticipation loans, major tax preparation companies are offering new financial products called refund anticipation checks (RACs). When a taxpayer can’t afford the cost of tax preparation services, a temporary bank account is opened where the IRS deposits the tax refund. Once it is deposited, the preparer takes out preparation costs plus additional fees. RACs tend to be less expensive than RALs, but they can still cost individuals up to $55 in fees.
The highly regressive nature of the payroll tax means that those with incomes above $102,000 pay less than their fair share—the payroll tax doesn’t apply beyond the first $102,000 of income paid. As a result, people who earn significantly more than $102,000 pay a payroll tax that is a lower percentage of their income than someone who makes less than $102,000.
Those who report their income with the 1099 form (freelancers and independent contractors) don’t have taxes taken out of their checks by employers, but are required to file their taxes quarterly. Low-wage precarious workers who are forced to file this way forgo unemployment insurance, unions rights, and many workplace protections, as independent contractors are supposed to be “free” workers only bound by contracts, not by an employer-employee relationship. Often people who are in effect regular employees of a business are misclassified as independent contractors so their employers don’t have to pay things like Social Security and Medicare taxes. This form of employer tax evasion is widespread; studies estimate that anywhere from 10% to 30% of employers misclassify employees. Efforts to challenge this practice have been undertaken by state and federal regulators. There have also been court cases and labor disputes, such as when a group of FedEx drivers filed a class-action lawsuit against the company in 2010 for being categorized as independent contractors instead of company employees.
Brief History and Legal Background
Resistance to taxes has a long and turbulent history. Throughout the ancient world, taxes were associated with foreign invasion, and a major cause of popular revolts against debt. Jewish Zealots in Judea organized tax resistance to the Roman Empire in the first century CE (Riggs 2008, 1–3). Fourteenth-century London was invaded by tens of thousands of peasants revolting against Parliament’s imposition of a poll tax. According to David F. Burg, eighteenth-century Japan saw many tax revolts, and heavy taxation was a major grievance in the French Revolution (Burg 2004, 299). During the nineteenth century, tax resistance was a weapon of anti-colonial rebels resisting European colonial domination in African countries such as Ghana and Sierra Leone. Mohandas Karamchand Gandhi explained that tax resistance also had an important political impact during the twentieth century, helping India’s campaign for independence from Britain, supporting the first Palestinian Intifada, and helping to oust Margaret Thatcher from power in the wake of Britain’s anti–Poll Tax riots.
Tax Resistance in North America predates the United States with the Algonquin refusal to pay taxes to Dutch Colonists to build a military base on Manhattan Island in 1637. Armed tax rebellion was a tactic of poor and indebted farmers before and after the American War of Independence. Henry David Thoreau famously called for those opposed to the Mexican-American War to refuse to pay taxes—an anti-militarist form of tax resistance that has been echoed during many later U.S. wars. The War Resisters League, formed in 1923, continues to organize and advise people who refuse to pay for war with their taxes. In the nineteenth and twentieth century, U.S., Chinese, Mexican, Greek, and Italian immigrants used tax resistance to protest the denial of social and economic rights.
Sadly, in recent decades, the political resistance to taxes has been taken up primarily as a right-wing effort to destroy social safety net programs and reverse the social gains of the 1960s and ’70s. Beginning with California’s “Taxpayers’ Revolt” of 1978, and continuing with Ronald Reagan’s campaign to lower taxes and “starve” federal social programs, the right-wing version of tax-resistance may have found its clearest articulation yet in today’s racist, anti-immigrant, and paranoid Tea Party movement. These contemporary “tax warriors” have made it hard to see the long and substantial history of left-wing, popular rebellions against unjust taxation.
What Happens When You Default?
If you never pay your taxes and don’t owe very much, the IRS will ignore you for a while, maybe years. But if your employers are filing tax forms (W-2s, 1099s) on their end, they’ll likely catch up with you eventually. If you file a return but don’t pay, they’ll catch up with you much sooner. The IRS details the collection process on their website.
What can and can’t they do?
- You will receive a written notice stating how much you owe and are given the option to pay it in full and be done with it (until next year).
- If you don’t have that money but are planning on paying, you can set up an installment agreement. It costs $105, although you can request a lower fee if you don’t make very much money. The IRS offers you different payment options—such as bank transfers, credit/debit cards, payroll deduction—and assesses different charges based on that. IRS rules for repayment are confusing. If you’re unable to hire an accountant, be sure to read their regulations multiple times and try to get them on the phone. Compare the different fees they charge for the different ways you can pay them, and see which is the most affordable and within your means.
- The IRS assesses fees for back taxes, and interest on the balance owed; the interest accumulates, and the fees don’t. For older tax debts, retroactive fees and accumulated interest might mean that most of your monthly installments pay for fees and interest, not the principal of your debt.
- When paying off tax debts in installment plans, it’s sometimes hard to find out exactly how much you owe, as the IRS assesses fees after payments. IRS letters with your balance on them do not show how they computed that figure, and talking to them on the phone often won’t help in getting many more details. The IRS details the types of fees it assesses on its website.
- The interest they charge you is relatively low, so for new tax debts (one to two years) it’s most likely less than a credit card. If at all possible do not pay your taxes with a credit card.
- The statute of limitations for tax debt is ten years, meaning that once the IRS sends you a bill, they have ten years to get it from you. After that period of time, the remaining amount of debt can no longer be collected. This does not apply to years that you owe taxes but have not filed.
What they can do
If you continue to ignore the IRS, they will send you a “Final Notice” notifying you that you have thirty days to pay your taxes before they put a levy on your assets and begin to seize them, although it often does not begin right way. The IRS has the right to seize wages and bank accounts as well as property such as houses, land, cars and businesses. The IRS moves to seize bank accounts and wages first and will be less likely to seize properties for tax debts under $5,000, although this is not a hard and fast rule.
What they can’t do
- The IRS states that it “can’t seize your property if you have a current or pending installment agreement [see the section Ways of getting out of tax debt], offer in compromise [also see below], or if [they] agree that you’re unable to pay due to economic hardship.”
- The IRS cannot seize more than 15% of federal payments such as a Social Security check.
- The IRS cannot seize the following payments: “unemployment benefits, certain annuity and pension benefits, certain service-connected disability payments, workers compensation, certain public assistance payments, minimum weekly exempt income, assistance under the Job Training Partnership Act, and income for court-ordered child support payments.”
- The IRS cannot seize personal and household property equal to or less than a total value of $6,250.
- The IRS cannot seize books or tools of the trade, business, or profession of the tax debtor equal to or less than a total value of $3,125.
If you haven’t yet filed your taxes and are planning on filing
These tips can help reduce the expense and stress of paying taxes, and can reduce the total amount you owe.
- Get free tax help in person. For low- to middle-income taxpayers, many credit unions, community organizations, and government agencies will prepare your taxes for free, allowing you to receive your full refund and tax credits in seven to ten days. You can dial 1-800-829-1040 to find the government-funded free tax preparation site nearest you.
- If you make $57,000 per year or less, you can have your taxes prepared and filed for free at freefile.irs.gov.
- Use free fillable forms: If you have some knowledge of how to file taxes but want an online account to save your information, do some of the math for you, and e-file for you, go here.
- 1099s / Independent Contractors: If you are receiving 1099s, you’ll want to fill out a Schedule C form, which is for reporting profit or loss on a business. Since you’re only taxed on your profit, you can reduce your tax bill by writing off business expenses such as tools, clothes, transportation, office equipment, cell phone bills, your car, and anything else used for your “business.” Save your receipts in case you get audited in the future! If you keep the business profit below $400, you won’t owe any self-employment tax either.
If you owe tax debt that you’re planning on paying
Ways of getting out of tax debt
- Installment agreement: make a monthly payment plan for paying off the IRS.
- Offer in compromise: this is a way to settle your tax debts for less than what you owe, based on ability to pay, income, expenses, and asset equity. To see if you qualify, answer the questions here. If you qualify, you’ll need to apply by going here. A $150 non-refundable application fee is required, and you’ll have to either make a lump sum payment or pay on a short-term payment plan.
- “Currently not collectible”: this is a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so. There are specific eligibility conditions.
- Tax debt can be discharged under Chapter 7 or Chapter 13 bankruptcy (see Chapter Ten) if it meets the following strict specifications:
- The due date for filing a tax return is at least three years ago.
- The tax return was filed at least two years ago.
- The tax assessment is at least 240 days old.
- The tax return was not fraudulent.
- The taxpayer is not guilty of tax evasion.
If you plan on not filing your taxes and not paying your tax debt
The IRS isn’t all-powerful and many people have avoided making payments on debt. However, failure to file tax returns could mean serving up to a year in prison and up to $25,000 in fines for each year not filed. If you are found guilty of deliberately evading taxes, you could serve up to five years and pay up to $100,000. This section borrows heavily from the National War Tax Resistance Coordinating Committee website.
A big concern with being in tax debt is having your wages seized by the IRS. To avoid paying taxes, you’ll need to make considerable lifestyle changes and probably adjust to having a lower, less regular income. The National War Tax Resistance Coordinating Committee recommends self-employment as the most reliable way to avoid collections. Working under the table or for small enterprises that don’t report taxes is another way. Another option is to change jobs often, as it will take the IRS a while to catch up with you.
If you’re not planning on filing and have a regular job, you can write “exempt” on your W-4 form so that no taxes will be withheld from your paycheck. Or just increase the number of exemptions. If you don’t have investments or itemized deductions, it would be simple to calculate how many exemptions you should claim in order to avoid a tax refund without getting a liability. Regardless of how many dependents you have, you can still claim, for example, five dependents for planning purposes. (When filing taxes, you would legally need to write the actual number of dependents.) Many websites, including the IRS website, feature a withholding calculator to help you make a more informed decision about this approach.
The National War Tax Resistance Coordinating Committee writes, “It is possible to protect deposits from IRS seizure. The IRS learns the location of all interest bearing accounts because financial institutions are required to report interest payments of $10 or more to the IRS. Collection can be prevented by removing all deposits from interest bearing accounts as soon as you expect or receive a ‘Final Notice’ to pay from IRS. If you remove the deposits in cash and deposit them elsewhere, you can avoid leaving a paper trail from one institution to the next.”
Because banks are required to report transactions in excess of $10,000 to the IRS, the National War Tax Resistance Coordinating Committee recommends removing and depositing money in amounts less than $10,000. They also recommend using a bank in a different neighborhood or town from where you live as well as using a post office box as a banking address.
Cars and houses
The best way to avoid seizure is to have cars and houses in the name of a trusted friend or relative. If you own a house that is your primary residence, another strategy is to avoid using it for mail and banking, and also having an unlisted phone number. The National War Tax Resistance Coordinating Committee writes, “This method isn’t foolproof, but it certainly throws significant roadblocks in the way of IRS collection efforts. Experience shows that IRS collectors give up rather quickly when they run into several dead ends, because they can’t waste too much time on any one case.”
Articles and Books
- Bartlett, Bruce. “Tax Cuts and ‘Starving the Beast’.” Forbes, May 7, 2010.
- BBC News. “1990: One in Five Yet to Pay Poll Tax.” August 14, 2008.
- BBC World Service. “The Story of Africa: Africa and Europe (1800–1914): Tax Wars.”
- Browning, Lynnley. “Critics Call Delaware a Tax Haven.” New York Times, May 29, 2009.
- Buffett, Warren E. “A Minimum Tax for the Wealthy.” New York Times, November 25, 2012.
- Burg, David F. A World History of Tax Rebellions: An Encyclopedia of Tax Rebels, Revolts, and Riots From Antiquity to the Present. New York: Routledge, 2004.
- Gandhi, Mohandas Karamchand. “Non-Payment of Taxes.” In We Won’t Pay! A Tax Resistance Reader, edited by David M. Gross, 353. CreateSpace, 2008.
- Graeber, David. Debt: The First 5,000 Years. New York: Melville, 2011.
- Institute on Taxation and Economic Policy. “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States (Fourth Edition).” January 2013.
- Internal Revenue Service. “Collecting Process: Installment Agreements: Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED).” March 11, 2011.
- Internal Revenue Service. “Failure to File or Pay Penalties: Eight Facts.” April 17, 2012.
- Internal Revenue Service. “Form 13844: Application for Reduced User Fee for Installment Agreements.” January 2013.
- Internal Revenue Service. “The IRS Collection Process: Publication 594.” April 2012.
- Internal Revenue Service. “Offer in Compromise.” January 29, 2013.
- Internal Revenue Service. “Payment Plans, Installment Agreements.” March 12, 2013.
- Internal Revenue Service. “Topic 201: The Collection Process.” December 27, 2012.
- Internal Revenue Service. “Topic 409: Capital Gains and Losses.” January 4, 2013.
- Leberstein, Sarah. “Independent Contractor Misclassification Imposes Huge Costs on Workers and Federal and State Treasuries.” National Employment Law Project, June 2010.
- Marysdaughter, Karen. “Palestinian Tax Resistance Update.” National War Tax Resistance Coordinating Committee, April 1997.
- Mattera, Philip, and Anna Purinton. “Shopping for Subsidies: How Wal-Mart Uses Taxpayer Money to Finance Its Never-Ending Growth.” Good Jobs First, May 2004.
- National Employment Law Project, “1099’d: Misclassification of Employees as ‘Independent Contractors’.” April 2010.
- National War Tax Resistance Coordinating Committee. “Practical War Tax Resistance #3: How to Resist Collection, or Make the Most of Collection When It Occurs.” Accessed March 26, 2013.
- NFA Tax Help. “Currently Not Collectible.” Accessed March 26, 2013.
- Perez, William. “Bankruptcy and Tax Debts: Five Rules for Discharging Tax Debts in Bankruptcy.” About.com: Tax Planning.
- Riggs, James Stevenson. “The Zealots and Taxes in Judea.” In We Won’t Pay! A Tax Resistance Reader, edited by David M. Gross, 1–3. CreateSpace, 2008.
- Skolnick, Adam. “Runaway Prison Costs Trash State Budgets.” Fiscal Times, February 9, 2011.
- Tax Justice Network. “Tax Justice in History: The Peasant’s Revolt.” July 12, 2009.
- Tompor, Susan. “Your Money: Expect to Pay for Fast Tax Refund.” USA Today, February 5, 2013.
- War Resisters League. “History of War Tax Resistance.” Accessed March 26, 2013.
- War Resisters League. “Where Your Income Tax Money Really Goes: U.S. Federal Budget 2013 Fiscal Year.” February 2012.
- Wu, Chi Chi, Tom Feltner, and Jean Ann Fox. “Something Old, Something New in Tax-Time Financial Productions: Refund Anticipation Checks and the Next Wave of Quickie Tax Loans.” Consumer Federation of America and National Consumer Law Center, February 2013.
- Wu, Chi Chi, and Jean Ann Fox. “The Party’s Over for Quickie Tax Loans: But Traps Remain for Unwary Taxpayers.” National Consumer Law Center and Consumer Federation of America, February 2012.