When I decided to stop paying my self-employment tax (see ’s Picket Line), I considered sending the money instead to a war tax resister “escrow” fund like the People’s Life Fund or the Conscience and Military Tax Campaign Escrow Account.
One description of these accounts put it this way:
“If you are collectible, you could consider using an escrow account,” [Tana] Hastings said. “If you know there’s a good chance your taxes will be collected, the escrow works well, because the money and the interest are put to good use, and in the event that the IRS seizes property or garnishes your wages, you can reimburse yourself, and not end up having paid your taxes twice.”
The nation’s largest escrow account, the Conscience and Military Tax Campaign, is located in Seattle. The escrow account is a trust fund, and war tax resisters can redirect the money they would have paid to the government to this account. The pool of money is used to support the sort of community development and education initiatives that many war tax resisters would rather see their tax dollars fund. In the event that a war tax resister is penalized by the IRS, he can withdraw some or all of his money from the escrow account to mitigate his losses. Because the war tax resister has relinquished legal claims to the money he places in the escrow account, the IRS cannot seize those assets to pay back taxes.
This sounds fishy to me. I believe that as far as the IRS is concerned, if you put money into a “trust fund” or “escrow account” from which you can later withdraw that money on request (the Conscience and Military Tax Campaign Escrow Account web page says “You can withdraw your money at any time. Make your request in writing, and NACC will return the amount requested, usually within two weeks”), this money is just another asset of yours that they’d be happy to seize. As the IRS puts it: “if the owner of property transferred to a trust retains an economic interest in or control over it, the owner is treated for income tax purposes as the owner of the trust property.”
If I had to guess, I’d say that the way the fund administrators get around this is to take complete legal title to the deposited money, but keep informal, extra-legal records of who-paid-what so that they can later disperse the funds as “gifts” or “grants” to the depositors when reimbursements are requested. This wouldn’t appease the IRS but might make it more difficult for them to do anything about it.
The Conscience and Military Tax Campaign Escrow Account web page puts it this way:
Deposits into the Account are confidential. The pooled funds are held in NACC’s name, rather than in the names of individual depositors. Some do choose to tell the IRS that they have deposited their withheld taxes in the CMTC Escrow Account (making a levy on those funds more likely). If you don’t tell the IRS about your deposits, it will not know about them. The IRS could, theoretically, trace the deposits through one’s bank — but this would be costly to the IRS, and isn’t very likely (and wouldn’t be possible at all for deposits made with personal money orders). It’s also possible that the IRS could physically seize NACC’s records (and/or those of other Alternative Funds), and thereby learn the details of the Account’s depositors. But here again, this would be an expensive undertaking, and likely generate an enormous amount of negative publicity, probably making it more trouble that it would be worth.
If I gave money to an escrow fund in this way, and then the IRS seized a hunk of change from my bank account and I then asked the fund to reimburse me — would that reimbursement legally count as part of my income for the year in which I received it? Because of the legal fiction behind the fund, it would not just be my money being returned to me, but a “grant” or “gift” to me.
The IRS says that “in general, a payment made by a charity to an individual that responds to the individual’s needs, and does not proceed from any moral or legal duty, is motivated by detached and disinterested generosity” and “thus, [is] excluded from the gross income of the recipients.” It’s hard for a tax-law naïf like myself to guess whether grants or gifts from one of these funds meet this test.
Why is any of this important? Because I still want to keep my income below the tax line so that I neither pay nor owe income tax, even as I resist self-employment tax illegally. If I receive a reimbursement from one of these funds, and the IRS gets wind of it, would that boost my income above-the-line for that year and cause me to owe even more money? — Would they try to tax me twice for the same wad of cash?
I asked about this on a war tax resister’s email list , hoping that some sharp legal minds had already been all over this, but I didn’t get much in the way of answers, and none that sounded particularly authoritative. One correspondent noted that there are many funds that are set up in many ways:
[It] depends upon the account and how it is set up. Does the fund have separate accounts for each depositor, or is the money all pooled? Do you still “own” your deposit or not? If it is a true escrow account, the money is still yours, and there really was no transaction. The Fund we set up in Atlanta specifically eschews being an escrow account: all monies go into one pot. Donations are made according to a formula, however, which recognizes the possibility of IRS seizures from contributors and tries to hold enough $$ in reserve so that those who request reimbursal of seized amounts, up to the amount deposited in the Fund, may reasonably expect to be able to receive such amounts. Reimbursal is provided only if the funds are actually seized, not merely upon request, because the depositor has no ownership of any amount in the Fund. And no promises are made; were everyone who deposited funds to incur seizure, there clearly would not be enough money to cover all requested reimbursals, because some has been given away. Of course, not everyone is seized from, by a long shot.
This arrangement is clearly different from an escrow account which may just be holding money for you and from which you can get those funds at any time.
But the problem seems to be that either you are depositing funds into an account that you own in the sense that you can withdraw those funds from it at will (in which case, these funds are just like any other asset you own, except perhaps that they support charitable causes) or you are relinquishing your money to a fund that may in the future decide to grant its benefactors funds to reimburse them for seized money (in which case, that might be considered taxable income — more grist for the IRS mill).
The correspondent says that any such reimbursements would not be reportable — “The IRS has stolen money from you and friends from around the country are giving you a gift to help you out. Plain, simple, and definitely not income.” It’s true, according to the IRS, “Generally, property you receive as a gift, bequest, or inheritance is not included in your income.” Furthermore…
If you gave any one person gifts in that valued at more than $11,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts.
The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.
But I’ve got to say that at the end of this information dump, I still don’t feel like I have any absolutely authoritative answers. For now, I think I’m going to be my own personal alternative fund.