Another Battle In The Tax Revolt

Four years ago, small business owners who stopped withholding taxes from employee paychecks told Correspondent Vicki Mabrey that there was no law requiring most Americans to pay income taxes -- and challenged the Internal Revenue Service to prove them wrong.

Al Thompson is one of the employers in the movement. He's been paying his income taxes since he was 16. But he's not paying them any more.

"We're paying a lot of money that we don't need to into a system that is basically extorting money from its citizens, and it's got to stop. Somewhere, it has to stop," says Thompson.

Not surprisingly, the IRS stopped Thompson. Last November, he was arrested after a high-speed police chase near his home in California.

He was charged with, among other things, conspiring to defraud the government and failing to collect and pay thousands from the wages and salaries of his employees.

If convicted, Thompson could face 68 years in prison and more than $3 million in fines.

The Internal Revenue Service has taken aim at a new group of tax protestors: dozens of small business owners who have stopped withholding taxes from employee paychecks.

Declaring there is no law that requires most Americans to pay income taxes, they have publicly challenged the IRS to prove them wrong.

Their revolt is a direct challenge to the way the U.S. tax system runs; about 70 percent of the taxes the IRS collects is turned in by the nation's employers.

Some of these protesting businessmen are not garden-variety tax cheats, says Correspondent Vicki Mabrey. They believe they are defending basic liberties threatened by big government and are willing to put not only themselves, but their companies and employees, in jeopardy to keep government, as they see it, in its place.

This loose band of lifelong tax warriors has found new recruits among people who own companies and even former IRS agents and auditors, like Sherry Jackson.

"They're calling us fanatics. I don't care if you call me Bozo the Clown. But I have one question. Where is the law? Show me the law," she declares, referring to the tax code.

"We're paying a lot of money that we don't need to into a system that is basically extorting money from its citizens, and it's got to stop," says Al Thompson, a small businessman in the movement.

He's never broken the law, pays sales and property taxes, and has furnished income tax since he was 16. But he's not paying them any more.

Living a comfortable, middle-class life in northern California, Thompson owns a small aviation supply company employing 25 people. Like others in the movement, he controls the payroll and is not withholding taxes from his employees.

The way Thompson reads the tax code, the only employees required to pay taxes are federal employees. "The definition of 'employee' only refers to federal workers," he says. "It doesn't include people that live and work in the 50 states."

The code states: "The term employee includes an officer, employee, or elected official of the United States, a State, or ay political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term employee also includes an officer of a corporation."

Georgetown University Professor Clarissa Potter, who has written tax law, describes what she sees as what's wrong with Thompson's argument: "When the word 'includes' is used in the tax code, it means that the list that follows is not exclusive, meaning that there may be other people that are within the definition of the word 'employee' that aren't in the list that follows."

Thompson is convinced he's right because he spends hours every day researching the tax code. In his view, an employee is not the people who work for him.

The Internal Revenue Service is not taking his challenge lightly, because growing numbers of small businessmen are doing the same thing. IRS Commissioner Charles Rossotti says the agency is going after all of them.

"We are particularly vigilant about employment taxes, because they are so important...and they affect employees as well as taxpayers," Rossotti says. "We do take enforcement action; if necessary we take them to court. And they end up paying not only their taxes but fines...and in some cases going to jail."

This kind of activity has come and gone over the years, but has never taken off, Rossotti says. "It's really a tribute to the common sense of the American taxpayer," he says.

The IRS is suing one of the business owners in the movement. Others, including some whose names and companies are posted on different Web sites, have been hit with warning letters. And so have their employees.

Thompson knows he could face backbreaking fines and even prison. He has written to the commissioner in the hopes he'll get an answer after 40 years of paying taxes. The IRS, however, went after his bank records and put his employees on notice.

Two employees quit over Thompson's decision. The extra money in the paychecks of the remaining 25 doesn't ease the anxiety about being caught between the boss and the IRS.

"My taxes aren't being taken out but I plan on paying my taxes, which has been hard for me because I'm not good at saving money," says one employee, who adds that some don't understand the laws and the issues at stake. "The IRS should give Al an answer one way or the other on this and settle this issue."

Those inside the so-called tax honesty movement believe a national sales tax or a flat tax could be more fair than the income tax.

The tax man strode into most American lives after the bombing of Pearl Harbor. To raise a war chest, income taxes - once reserved for the rich - were extended to all Americans for the first time in history. The expanded tax was supposed to be temporary, ending with the war.

The income tax was so new, that to explain it, the government commissioned a Disney film starring citizen Donald Duck. It made filing returns look easy for the millions of new taxpayers and promoted the benefit of withholding.

Roger Pilon, who studies tax policy at the Washington-based Cato Institute, which advocates smaller government, isn't surprised about the protest, especially among small business owners.

"These people, as businessmen, are being asked not only to pay the taxes for their employees and for themselves, but to collect the taxes," he says. "They are in effect deputized as agents of the government, and they are not being paid for that."

Put yourself in the position of the employers, Pilon says. "They see the government raining down upon them, one regulation after another and one tax after another."

Joe Banister, Thompson's accountant, is somewhat of a hero in the movement.

Banister, equipped with badge and gun, once investigated tax cheats as a criminal investigator for the IRS -- until he started reading the tax code. "At the end of my third year, I began to investigate the claims that were made by people who said that the income tax is not mandatory for all Americans to pay."

Eventually, Banister sent a report of his findings to his superiors, questioning even the constitutionality of the IRS itself. The agency wrote back and suggested he resign.

"It seems to be kind of a cultural thing there," Banister says. "Don't ask any questions. Just do your job. Mind your own business."

He doesn't advise clients not to pay taxes, he says. "I tell them that the IRS has ruined people's lives and that it's risky to do something other than what the IRS expects," he says.

Banister is one of a handful of IRS agents who could be said to have gone over to the other side.

"It's a free country," Rossotti says. "But when the matter is put to the test, which means in terms of court and enforcement action, there is a 100 percent success rate in shooting down these arguments."

Often courts dismiss the arguments without hearing them. Thompson and the other businessmen want their day in court. Thompson is betting his business on the argument that the tax code simply does not include private business employees.

Thompson has been very public about his actions. He and a few other business owners have appeared in full-page newspaper ads pushing their cause, almost taunting the IRS.

Banister has moved more cautiously. He says he's wrtten checks to the government as providing his fair share. "The purpose of me writing a check to the government is to...show my fellow citizens that I'm not trying to cheat anyone," he says.

But Thompson says he has no doubt that the law is on his side. "We're...not risking anything because they don't have the jurisdiction nor the lawful authority to do anything other than collect what is within the boundaries of the codes and the regulations."

Commissioner Rossotti maintains the businessmen's protest is directed at the wrong target.

"There are a lot of questions that people can raise about how the tax system in this country is structured, how the tax code is structured, but that's why we have a democracy," he says.

"We have a Congress and everybody has the right to go talk to their congressman or senator about what they like and don't like about the tax code."

The government will eventually crush them in this case, according to Pilon. He calls the leaders of the tax revolt "foolish heroes."

"They're reading the tax law in so strained a way, and they will in time pay the price for it," says Pilon. "But they're heroes in the sense that they are bringing public attention to an issue that needs public attention."