IRS Not Chasing Tax Miscreants

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A report issued last week by the U.S. Treasury Inspector General for Tax Administration claims that the Internal Revenue has failed to follow through on collection efforts relating to business taxpayers that are breaking tax laws.

The report describes 1,841 cases of tax fraud wherein businesses are either failing to withhold taxes from employees or are guilty of filing frivolous returns. Of those cases, only 233 were entered into an IRS database of taxpayers who file frivolous returns.

The report also referred to at least 165 taxpayers files that been lost. In addition, only approximately half of the cases that were entered into the database were properly pursued. Many cases were abandoned due to IRS examiners not following up with proper paper work necessary to begin an audit.

In another section of the report, the Treasury inspector general applauded the IRS, noting that civil injunctions have been against nine promoters of what is commonly referred to as the "861 position," a reference to Section 861 of the Internal Revenue Code. Many potential tax dodgers have argued unsuccessfully in court that Section 861, "Income from sources within the United States," provides a description of taxable income that does not include domestically earned income.

"The regulations say that only income from specific types of commerce, all of which have some kind of connection to international commerce or federal possessions, are taxable," says Larken Rose, author of the report, "Taxable Income," and proprietor of the Web site, www.taxableincome.net. Mr. Larkin's report begins, "Despite 'common knowledge' to the contrary, the income of most Americans is not subject to the United States federal income tax."

Of the nine Section 861 cases the IRS is pursuing, injunctions have been issued in eight cases and the ninth case is still in process.

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