A Very Taxing Process

June 24th, 2010 // 8:23 pm @ Phil

After fighting what I believed was an unconstitutional federal income tax, six years ago I capitulated, filed returns, and have since then, paid $120,054 in combined state and federal income taxes (including the interest and penalties). At the time, I was also working toward a settlement with the IRS. What derailed this settlement process was becoming a target for an audit. My experiences provide a case study of why we need to get rid of the income tax on wages and salaries.

Years ago I became interested in the income tax and wanted to understand how it worked. I had read a lot of the literature on the subject. In doing so, I noticed there was a big gapping hole in the literature. No one had written about the intent of the Income Tax Amendment when it was debated and finally ratified on February 25, 1913. Plus I thought it would be easier to research the purpose and intent of the income tax rather than study the Internal Revenue Code. I focused my research on the years 1908 to 1913, as this was when the income tax amendment was debated. Because I discovered so much new information in doing this research, I wrote a book about it.

The genesis of the modern income tax was the Democrat Party’s Presidential Platform of 1908. The income tax plank read,

“We favor as part of our revenue system, and we urge the submission of a constitutional amendment specifically authorizing Congress to levy and collect a tax upon individual and corporate incomes to the end that wealth might bear its proportionate share of the burdens of the Federal Government.”

At the time there were no entitlement programs, and the greatest beneficiary of government was the wealthy. But with only consumption taxes, the wealthy were not paying for the benefits they received. The income tax did not start out as a “soak the rich” scheme, but only as an attempt to be fair in distributing the burdens of the cost of government. It was not a tax on people, but only a tax on what was called at the time “accumulated wealth.”

In 1909, the author of the Income Tax Amendment, Senator Brown from Nebraska said “It is the theory of the friends of the income tax proposition that property should be taxed and not individuals.” 44 Congressional Record, 1570 (1909).

I litigated the issue with the government, challenging its constitutionality. My challenge to the income tax included petitioning the United States Supreme Court. But the Supreme Court would not hear my case. The late Mr. Paul Chappell, a former attorney with the IRS Office of Chief Counsel for the District of Columbia said of my Petition “Reading Phil Hart’s work is like returning to law school. After decades of practice as a tax attorney, Phil makes me feel as if I’m a student again.” And after reading my Petition for the eighth time, another tax attorney, Mr. Arch McColl wrote me, “What you did was brilliant legal work in your Petition for Certiorari!”

In 2004, after my judicial remedy had been exhausted, I filed 1040 returns to get caught up. Suddenly I found myself in an IRS audit. I had to sue the IRS to avoid turning over the names and addresses of those who purchased my book, Constitutional Income. I was represented by the Center for Individual Rights, a Washington D.C. public interest freedom of speech law firm. As far as CIR can figure out, I was the first author in American history to have the government demand I turn over such names and addresses.

The Center for Individual Rights won these lawsuits for me. There were actually two lawsuits, and each lawsuit took a year. However, four years later when the IRS issued their final audit report, the IRS denied all my business deductions for eight years. The amount of denied deductions totaled $300,000. Why? An IRS employee told me “When you don’t give us
everything we ask for, you get all of your deductions denied.” For them, this isn’t about the liens or the money; it is about getting the names.

I believe I have a First Amendment right to protect the identities of my readers, just as a journalist has a First Amendment right to protect their sources. I also believe in protecting my readers’ Forth Amendment right against unreasonable searches and seizures. These are principles worth defending!

During this four year audit, I provided the IRS with all my canceled checks, receipts, invoices and so on. Boxes worth. Yet all these deductions were denied solely for political reasons. Losing $300,000 worth of deductions inflated my now purported “taxable income” and the tax imposed thereon. My expenses for engineering and drafting personnel were denied, office rent expenses denied, office supply expenses denied, book publishing expenses including editors, artists and printing expenses denied. All of my business deductions were denied, all of them. What small business can operate with $0 in business expenses over an eight year period?

Protecting my readers from having big government snooping into their lives has increased my state and federal tax liability by about $125,000.

When the Idaho State Tax Commission got their hands on this IRS audit report that reflected the $300,000 in denied business deductions, they wanted their cut of the inflated “taxable income” too. This is the main issue currently being contested in my litigation with them.

After the Supreme Court declining to hear my case, I began making tax payments. But of the $120,054 I have paid since then, not a single dollar of these payments has been used to offset any of the lien amounts. It’s a nightmare. I would happily trade places with any of my detractors who somehow think I’ve gotten a “good deal.”

Regardless of whether or not the income tax on wages and salaries is constitutional, most agree on one thing: it is an inefficient and privacy invading tax. On the private side, it takes 22 cents for its bookkeeping, reporting, accounting fees, and legal fees for every $1 collected. Whereas a consumption tax takes only one cent for compliance on the private side for every $1 collected.

The income tax places a huge tax on wages and salaries. We all know you get less of what you tax. And guess what? We now have fewer jobs. The income tax on wages and salaries is a job killer. And such a complicated system provides many opportunities for abuse on both the private side and the government side.

These circumstances of mine have created a lot of controversy. But how can it be wrong for me to fight for my legitimate deductions and to stand on my principals?