The tax fraud trial of Wesley Snipes began this week in Florida, and the actor faces up to 16 years in prison for his failure to file tax returns between 1999 and 2004, or pay tax on the estimated $38 million he earned in that period.
Snipes faces an uphill battle, as few succeed in convincing juries of a genuine, good-faith belief that he or she had no obligation to pay income taxes. Snipes has relied on the "§ 861" argument, which asserts that only items listed in Section 861 of the Internal Revenue Code are taxable, and therefore, the domestic income of U.S. citizens is not taxable.
If only. All income, earned inside and outside the country, of U.S. citizens is taxable under Sections 1, 61, 63, and others. Section 861, and accompanying regulation 26 C.F.R. § 1.861-8, list what income is earned "inside" the country, and that's relevant only to non-residents and foreign corporations because they only pay tax on domestic income. The list doesn't really matter for U.S. citizens, because they are taxed on all income, whether it is earned domestically or foreign.
Even putting that aside, among the taxable items on the § 861 list is "[c]ompensation for labor or personal services performed in the United States." § 861(a)(3). So any income earned in the United States is taxable even under Section 861. IRS regulations re-iterate this point, stating:
"In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States."
26 C.F.R. § 1.1-1(b). § 861 advocates argue that regulation § 1.861-8 (which provides more detail on types of income that are to be treated as "domestic") overrides § 861(a)(3), but laws always override regulations.
Courts have conducted a similar analysis in reviewing the § 861 argument, and those who rely on it to avoid income taxes routinely face fines and imprisonment. The taxpayer often gets much harder than scammer who gives him or her fraudulent advice. For a list of cases and penalties, see here.
The Internal Revenue Code is long and complicated, and we at the Tax Foundation work for a tax system that is simple and transparent, and doesn't inhibit our economy with excessive burdens on individuals. But we're not there yet. If someone tries to convince you that there's no obligation to pay income taxes, remember that if it sounds too good to be true, it often isn't true.
We've written before on Virginia's "abusive driver fees" and "civil remedial fees," and why they are just a tax on traffic offenses. Because the revenue goes to general state spending, they are properly called a "tax" and not "fees." We've covered how this is an example of politicians targeting easy revenue sources for punitive taxes, the public outcry over the huge assessments, and finally, the pending court challenges.
After defending the surcharges for months, Virginia Governor Tim Kaine (D) may be ready to give up on them. At the end of yesterday's State of the State Address, he said he would sign a repeal:
The imposition of higher fees on drivers who commit serious traffic offenses was designed to both increase transportation revenue and encourage safer driving habits.
After six months, neither goal has come to pass. The abusive driver fees will not generate the amount of revenue we had hoped. And neither the number of traffic tickets issued nor the tragic number of deaths on Virginia highways last year indicate that the fees have improved highway safety.
Virginia citizens in huge numbers have told us that the fees should be repealed. We should listen to them. I hope that this session, you will send to my desk a bill fully repealing the abusive driver fees.
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