Law Office Management
May 2, 2008
A Taxing Problem
A growing number of Americans are denying that they owe any taxes. The DOJ has noticed, and it's swinging into action.
For all the attention Wesley Snipes's tax trial attracted earlier this year, you could be forgiven for thinking that the Hollywood star is the only American arguing he is not obliged to pay taxes. But, in fact, Snipes is part of a small but growing number who are refusing to write checks to the IRS. As a result, the tax division of the U.S. Department of Justice, led by a California lawyer, plans to step up its enforcement efforts against so-called tax defiers.
Tax defiance, unlike tax avoidance based on legitimate legal principles, is based on novel regulatory interpretations-"arguments that courts have consistently and routinely rejected," says tax division head Nathan J. Hochman.
Hochman, 44, was a principal at Hochman, Salkin, Rettig, Toescher & Perez in Beverly Hills prior to his confirmation in December. He says his organization is getting ready to roll out a new national initiative focusing on "modern-day snake-oil salesmen" who try to make a profit by selling tax-defiance plans around the country.
A national perspective is necessary, says Hochman, because individuals who promote tax-defiance strategies often target citizens of numerous states, popping up in one part of the country after running into trouble in another. "You can view the tax-defier movement as a many-headed hydra," he says.
A popular tax-defier defense is the "861 argument," which refers to a section of the IRS code that protesters claim does not explicitly state that domestic income is taxable. Courts typically don't buy it.
Still, a handful of lawyers defend people who argue 861. For example, there's Milwaukee-based Robert G. Bernhoft (who represented Snipes) and Houston-based Joe Izen (who represented a prominent Los Angeles tax protester, Lynne Meredith, a few years ago). And California has Rancho Santa Fe defense attorney William Cohan.
Cohan, 61, concedes that tax-protest cases may not be a great source of revenue, taking up only 10 percent to 20 percent of his white-collar-defense work over his 30-year career. "There's some money in it," he says, "but it's more a question of defending people's rights to think differently."
One of Cohan's clients is Las Vegas businessman Robert Kahre, who likes to pay his employees in silver coins to exploit a tax loophole. Kahre's theory is that a silver dollar-because it contains a precious metal-is worth more than a dollar bill. For tax purposes, however, such coins count as only $1-meaning that employees receive the additional value of the silver without being taxed on it.
But the successful defense of a tax-defier case doesn't usually turn on the merits of the client's theories. In fact, Snipes's lawyers went out of their way to describe the actor's ideas as "kooky" and "dead wrong." Yet no matter how kooky their theories, tax defiers cannot be convicted of serious felony charges if a jury is convinced they actually believe what they are doing is right.
In Snipes's case, "the lawyers bluffed," says Maryland-based tax and financial-scam expert J. J. MacNab. "The jury bought it."
In Kahre's case, it looks like the IRS won't be the only one missing out if the businessman runs short of silver dollars. "He owes me well into six figures," Cohan says ruefully.
Alexandra Brown
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