‘Deniers’ preach income tax avoidance

Government says prosecuting scheme promoters is difficult

By David Washburn
April 11, 2005
Union-Tribune San Diego

At first glance, the gathering looked like your typical weekend self-help seminar – a couple hundred paying customers in uncomfortable chairs listening with rapt attention to the charismatic “guru” at the front of the room.

The difference was that the speaker was dispensing advice that could land his customers in jail.

“There is no law that requires you to file an income tax return,” Steve Hempfling told a recent audience. “The IRS uses fear and threats to coerce you into ‘volunteering.’ “

NELVIN CEPEDA / Union-Tribune
Peymon Mottahedeh, who organized the 2005 Health and Freedom Rally in Newport Beach last month, talked with some of the 200 attendees who paid $60 apiece. 
Hempfling is among a hodgepodge of authors, radio personalities and former IRS agents who are the salespeople of a multimillion-dollar industry focused on persuading Americans not to pay their income taxes. They enjoy a cultlike following and bleed as much as $30 billion a year from federal coffers. The Internal Revenue Service does not keep specific statistics on non-filers, but experts say 100,000 to 200,000 people each year act on the advice of anti-tax groups.

And while federal prosecutors have made these groups a priority in recent years, shutting them down can be difficult because there has to be proof that they have had a direct hand in helping someone evade taxes for their actions to be considered a crime. Arguments against paying federal income tax are as old as the 1913 constitutional amendment that established it. They range from the simply illegal to the totally absurd:

Americans do not have to pay income tax because Congress never properly ratified the 16th Amendment, which established the tax. Only people living in the District of Columbia and U.S. territories such as Puerto Rico and Guam have to pay the federal income tax. The rest are citizens of the states in which they reside, not the United States.

Wages, tips and other compensation for personal services are not income, because there is no taxable gain when a person “exchanges” labor for money.

All of these arguments and others have been struck down by the courts, with case after case establishing that the 16th Amendment is on solid legal ground. Many non-payers have been hit with fines, and some have served prison sentences ranging from a few months to several years.

Nonetheless, a hard-core group of true believers continues to file “zero” returns, create bogus charities to avoid taxes or simply not file. “They seem to be able to draw people in and convince them of their argument, even though there is no legal basis,” said Gary Tang, a spokesman for the IRS field office in Los Angeles.

The event at which Hempfling spoke, the 2005 Health and Freedom Rally in Newport Beach, drew more than 200 people who paid $60 apiece. Almost every speaker also had a table with pamphlets, tape sets and proposed consulting arrangements – costing anywhere from $2 to $6,000 – for those who wanted help not paying their taxes.

Unlike scams involving offshore banks and shell corporations that are used mainly by rich tax evaders, these methods attract people from all rungs of the socioeconomic ladder. The typical “tax denier” is someone deeply angry at the government because of a breach of privacy, either real or perceived, or because of a financial setback for which he or she blames the government, said J.J. McNabb, a financial consultant and an expert on anti-tax groups.

“The current tax protest community is a cult more than anything else,” McNabb said. “There is something within them that makes them willing to risk everything on these arguments.”

Promoters enjoyed a heyday in the mid-to late 1990s as Internet use exploded and the IRS scaled back on enforcement after allegations of harsh tactics being used by auditors. The low point for the agency came in 1997 when the Senate Finance Committee held hearings on accusations of “taxpayer abuse” by IRS agents. Senators were told audit horror stories, including one claim that an agent may have “hounded a taxpayer to death.”

The result was the IRS Reform Act of 1998, which established the “Taxpayer Bill of Rights.” Taxpayers were given a broad array of rights and protections, and aggressive auditors were essentially told to back off. “When Congress neutered the IRS in 1998, they went way too far,” said Jay Adkisson, an Orange County financial adviser who runs a nonprofit Web site focusing on tax fraud, http://www.quatloos.com.

“It gave these snake-oil salesmen a license to steal,” he said.

Criminal enforcement declined 50 percent from 1993 to 2000, according to the Justice Department. And a 2001 report by the Government Accountability Office showed that the number of IRS audits dropped to below 1 percent of all returns between 1996 and 2000. “It’s fair to say there was great emphasis on customer service [at the IRS], which is fine, but no emphasis on enforcement, which is a problem,” said Rod Rosenstein, a deputy assistant attorney general for criminal tax enforcement.

Both the IRS and the Justice Department have significantly beefed up enforcement, with the number of tax cases authorized by the Justice Department increasing by 60 percent since 2001. But they are still not prosecuting promoters at the same rate as they were in the early 1990s. The lack of enforcement is a marketing tool for the promoters, who use their freedom from prosecution as proof that their methods work.

“I would love for the IRS to come and show me the law that says I have to pay income tax,” said Peymon Mottahedeh, who runs the Freedom Law School out of his home in San Bernardino County and sells anti-tax programs for $900 to $6,000.

“But they just ignore us and hope people won’t look up the facts for themselves,” he said. Mottahedeh, who organized the event in Newport Beach, boasts that none of his students has ever been charged with tax evasion: “No one has ever come to me and said, ‘Hey, Peymon, you got me in trouble.’ “

His statement is nearly impossible to verify because of privacy and IRS disclosure laws. Even with beefed-up enforcement, catching the promoters can be tricky. The First Amendment gives them the right to say anything they want about the tax code. So investigators have to either catch them filing their own bogus returns or actively helping someone evade taxes.

“Just selling the book or doing the seminar is not enough,” said Assistant U.S. Attorney Lori Hendrickson. “There has to be proof that they had direct influence in a return being false.”

Despite this heavy burden of proof, federal prosecutors have had some recent success. Some of the biggest names in the movement have been indicted since the beginning of last year. Irwin Schiff, considered the granddaddy of tax protesters, was indicted last year in a Nevada federal court on 33 counts of tax fraud. He is charged with aiding and assisting in the preparation of fraudulent tax returns, as well as tax evasion. Schiff, 77, is one of many who uses “zero return,” in which filers put a zero on every line of the federal tax return related to income and expenses.

The U.S. Attorney General’s Office alleges that Schiff and his co-defendants helped file 4,950 tax returns that fraudulently reported no income and that his Las Vegas-based business, Freedom Books, generated nearly $4 million between 1997 and 2002. Schiff, who could face a maximum of 43 years in prison if convicted of all charges, calls himself the “nation’s leading authority on the income tax.”

He says it’s the government, not he, who is breaking the law, and posts his court filings on his Web site. “If the American public knew what was going on, nearly every federal judge would be behind bars,” Schiff said. Federal prosecutors scored another victory last May when Orange County resident Lynne Meredith was convicted in Los Angeles of conspiring to defraud the IRS, fraudulently using Social Security numbers and failing to file income tax returns.

From 1991 to 2002, Meredith’s We the People organization falsely told thousands of its customers that paying taxes is voluntary. Prosecutors introduced evidence showing that Meredith earned $8.5 million during the 12 years she peddled the scheme. Meredith, who has appealed, could be sentenced to more than 25 years in prison.

In San Diego last May, a federal grand jury indicted El Cajon attorney Richard D. Corona and his wife, Tracy, on counts of conspiracy to defraud the United States, income tax evasion and failure to pay income tax. From 1997 through 2001, Richard Corona stated that he did not owe any federal income tax because he was a “natural born free American National Sovereign Citizen of the California Republic, non-resident of the federal ‘United States.’ “

The indictment alleges that the Coronas filed joint income tax returns for 1998, 1999 and 2000 that resulted in more than $600,000 in total income tax due but not reported.

The Justice Department has also revitalized its civil injunction program, which takes advantage of a provision in the tax code that allows a civil judge to order promoters to stop marketing and turn over lists of their customers.

The number of these suits has gone from zero in 2000 to 64 last year, according to Department of Justice records.

All of this activity has had its effect on anti-tax proponents, said Rosenstein of the Justice Department.

“What we are seeing is a change in their attitude toward law enforcement,” Rosenstein said. “Four years ago, they weren’t worried about enforcement. Now they are.”

Peymon Mottahedeh
President – Freedom Law School
(813) 444-4800 | www.livefreenow.org

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