A Picket Line reader, “D.W.,” wrote in response to ’s entry:
I am quite surprised to hear that you have made no plans to protect your assets. With all due respect, I don’t really understand the point of what you are trying by being headstrong and not paying the taxes you owe, yet not having an equally strong plan to protect yourself. They will get to the money that you leave out there sooner or later… and I am guessing sooner since they have now gone into levying mode.
I have heard stories where people withdraw all of their money from their accounts including IRAs (which I believe can be done at anytime), savings, HSA, etc. leaving nothing left to take. They will still assess penalties for withdrawing from tax advantaged accounts… they just add it to the bill… the bill you aren’t paying. These people will often lease a car too and make cash payments… or buy a car that is too cheap for them to bother with. I have also heard of people selling their homes in favor of apartments for which they pay the landlord cash or with a money order available at any convenience store. There are links all over the internet about how people do stuff like this.
As an employee with an annual W-2, I have no choice but to pay whatever they say, so I’m no expert in this sort of thing. But not having some kind of plan set up just means they take your money without you having to write a check… which I would bet they will do within , making your whole exercise somewhat futile and more painful than need be.
I wrote back to D.W., noting that as I don’t own real estate or a car and don’t have a significant amount of tangible property of any great value, I’m not in much danger of property seizure. It’s mostly bank accounts, some stocks & mutual funds, and retirement accounts that are in danger.
I could sell the stocks/mutual funds and withdraw all the bank account money, but I think the retirement accounts are a tougher nut to crack. I was under the impression that if I were to withdraw those, I’d be hit with a penalty that would be assessed immediately, and that this (along with some tax percentage) would be withheld by the brokerage from whatever I withdrew, and handed over to the IRS.
Since then, I’ve checked the fine print at the brokerage that holds my retirement accounts and this is what they say:
IRS regulations require [us] to withhold federal income tax at the rate of 10% from your total withdrawal unless your withdrawal is from a Roth IRA, or unless you elect otherwise. You can change your tax withholding percentage by entering any whole number between 10 and 99 or by electing not to have federal tax withheld (provided that you have supplied [us] with a U.S. address). [emphasis mine — ♇]
My brokerage would, however, file a 1099R with the IRS indicating that the withdrawal had taken place. Theoretically, though, I could quickly withdraw everything and bury it in a treasure chest on a desert island. The IRS would still consider the total amount I withdrew to be taxable income (which would wreck my staying-under-the-tax-line plan) and would not only tax it as such but would add a 10% early-withdrawal penalty on top of that. However, I could continue to refuse to pay, and they would then have a hard time finding any assets belonging to me unless they got ahold of my treasure map.
They might respond by trying to seize any payments being made to me by third-parties, which would mean that I’d probably need to do some careful dancing from client to client to keep ahead of their liens (or work solely in the underground economy, but that brings up a whole other line of hypotheticals). They might also respond by asking a court to force me to reveal or surrender my assets or face criminal penalties. I don’t know for a fact that they can do this, but I’d be surprised if they couldn’t.
That wouldn’t be the end of the game, of course. As long as I’m doing theoretical civil disobedience, I might as well contemplate going all the way and choosing jail time rather than complying with discovery. At any rate, that strikes me as one possible conclusion of this path.
D.W. since has followed-up on his earlier email (he’s given his blessing to my reprinting them here, by the way), highlighting the incompatibility of my two approaches to tax resistance (legally eliminating my federal income tax by qualifying for credits in a way that exposes my assets; illegally refusing my self-employment tax in a way that makes my exposed assets vulnerable to seizure), and proposing another method of tax avoidance — making a living from returns on capital rather than from earned income:
Your response about trying to resist taxes legally does not fit together well with your decision to withhold payment. Withholding payment is in itself illegal. To me, you cannot be both a tax avoider (perfectly legal) and a tax evader (illegal). By choosing not to pay self employment taxes you have made yourself an evader. The actions of an evader are far different than the actions of an avoider. Evaders hide assets, avoiders shelter money in tax deferred accounts. With all due respect, I think you need to make a choice about how you go about minimizing your tax bill.
On the other hand, ’s post does have merit on the grounds of costing the IRS money to levy. It is certainly cheaper for them if everyone just includes a check. Also, by not paying and forcing a levy you are generally slowing down the IRS in their efforts to catch others. So, there is some benefit to society at large though it is difficult to quantify. Of course, you also have to ask yourself if you want to help society at large. To me, society is mostly full of idiots who can tell you what happened on American Idol or Desperate Housewives but couldn’t find North American on a map, let alone understand how destructive a vote for Hillary could be. Are these the people you want to protect by gumming up the works at the IRS? Because it definitely costs you something to do this… though as your post said, it is hard to determine how much.
Just a few others thoughts I had…
You are not alone in not wanting to pay taxes… though I think you are well in the minority by being an evader. There is a whole group of people out there who also don’t want to pay taxes, and they don’t, but they do it legally… people with capital. If you can accumulate enough capital, you could potentially live the rest of your life with little or no work and paying little or no tax. Capitalists are often responsible for electing public officials and these public officials pay them back by giving them a “free ride” on their investments. There are so few people with capital (savings) that it doesn’t impact the Treasury much to offer benefits to this group.
For instance, if you have a portfolio of $500k you can invest it in tax managed mutual funds (VEA, for instance). These funds make an effort to offset any realized gains with realized losses. So your portfolio may grow to $550k in one year, but you owe nothing.
Now, you may like to take the $50k out at some point. Well if you do, you are already ahead of the game… there is no self employment tax on the $50k, no medicare, etc. All you will owe is the 15% on whatever is over an above your basis. Since your basis is approximately $.90 of each dollar in this instance, you have a $5k profit so you owe $750, yet you are spending $50k. If you have other investments in a loss position, you can sell those and fully offset the $5k bill. This benefit lessens as time goes on as your basis lowers, but it is one of many things that can be done.
Also, you can “bunch up” your deductions. For the year that you take out the $50k, prepay your property taxes for the following year… then take the standard deduction the year after that (since you won’t have a property tax deduction). Donate to a donor advised fund that year too (more on that later). I know you said you don’t have a house. I recommend you buy one. A paid for house is one of the best tax shelters you can get… and it is not for the interest deduction.
Here’s why… you pay rent now. In order to pay that rent you need to generate income, which counts toward your taxable income line, which you are trying to keep at a certain level. Wouldn’t it be nice to not have to pay that rent and the taxes associated with it? Or, in your case, wouldn’t it be better to make that money and spend it on something other than rent? With a paid for house, you are essentially paying yourself with tax free dollars. Hillary Clinton has talked about taxing this “imputed rental income”… that is how big this benefit is. Even if you have to pay tax on income in your quest for capital, the long term benefits of this “tax free imputed income” far outweigh the taxes paid in accumulating the capital to buy the house.
It is even possible to acquire capital without paying tax along the way… you can take your IRA money and invest it in a business. Or you can start a small business with a loan and sell it later for a capital gain and only be subject to the 15% tax. To get money out of the IRA, the IRS has what is called a 72(t) exception. If you follow a certain withdrawal formula, you avoid the 10% penalty. If those withdrawals are less than your taxable income goal, you will owe no tax at all. The younger you are, the lower the required withdrawal amount will be. So you have money that is invested and growing, which you paid no tax on to begin with, coming out of the account without penalty and with no tax. It doesn’t get much sweeter.
Also, you may want to keep in the back of your head the idea of a donor advised fund, such as those available at www.schwabcharitable.com. If you find yourself owing some tax, you can donate money to this fund and get an immediate deduction. They will then hold the money in an account for you until you are ready to send it to a charitable organization. The money will grow tax free in one of several “investment pools” you can choose. People sometimes use these funds to travel with groups like www.livada.org which build houses for orphans in various parts of Europe. They will use your donor advised fund money to buy your tickets. People will often “extend their trips”… spending a week building a home for an orphan then spend time traveling around Europe. Lots of organizations like this exist.
Even better, the DAF accepts appreciated stock. You will get a deduction for the full amount of the stock you donate and you will owe no tax on any unrealized gains ever (as long as the stock was held for at least a year). Of course, these options are only available to avoiders. The IRS will take your house, your IRA, probably even your DAF if you evade. They can’t touch you if you avoid. The road for legal avoidance has already been paved by the capitalists who have put the government freaks we have in to power. You too can benefit from their work.
Again, I am not an expert in this stuff, though I know more about avoiding than evading. You may be able to work some of this stuff into your plan and maximize the amount of money you can spend while minimizing or eliminating money sent to the IRS and keeping yourself out of trouble.
This is certainly interesting stuff. I’m going to have to look more closely at these options, particularly the 72(t) gambit. I hadn’t heard about the possibility of investing retirement account money in one’s own business — in fact, I’d heard this was prohibited — but it looks like it’s possible with some restrictions.
The idea of using a DAF to take a hemi-charitable vacation is also appealing, though it seems like exactly the sort of thing the IRS tends to prohibit. Perhaps if I learned enough about it, I could finesse the loopholes. Currently, itemized deductions like the charitable giving deduction aren’t particularly useful to me, but if I were pursuing a different tax avoidance method, they might be.
I agree that there’s a difficult-to-resolve tension in tactics between my legal tax avoidance techniques and my illegal tax resistance ones. They aren’t particularly compatible. Income tax avoidance has been working so well for me that I’m hesitant to break it off in favor of a fully-outlaw strategy, but then the self-employment tax becomes a hard nut to crack.
The key, as D.W. suggests, may be to get to a point where I don’t have any “earned” income at all, but live off capital instead. That may be a goal worth shooting for, and it’s certainly a nice job if you can get it.
