Dear Littler: Can Employees be Exempt from Income Tax?

Dear Littler: My company recently hired a new employee who is giving our human resources department some pushback on submitting his W-4. The HR manager says the employee mentioned something about not being subject to income tax? Is this possible? How should we direct HR to respond?

           — Annoyed in Anchorage

Dear Annoyed in Anchorage,

Stay calm, but your company may have hired a “tax protester.” Tax protesters are citizens who believe they are immune from income tax liability. Some tax protesters claim taxation is voluntary, while others assert the 16th Amendment—which gave Congress the power to impose and collect income tax—was never ratified.  Some just claim to be citizens of some mythical place, not subject to the laws of the United States.

We encourage you not to argue with your new hire. Tax protesters tend to create more esoteric arguments for their immunity to income tax faster than anyone at your company can refute their claims. It is still critical, however, to be aware of these arguments and their flaws. To help you understand why common tax protester stances are faulty, we will evaluate a few of the most common arguments. Then we will address what your company can do in response.   

Tax Protester Arguments

“Taxation is voluntary, and no law requires the payment of income tax.”

One common argument is that the tax system is voluntary. Yes, voluntary. This argument relies on two pieces of “support” — the Internal Revenue Service (IRS) Form 1040, and the Supreme Court’s 1958 decision in Flora v. United States.

The IRS Form 1040 is used to file annual income tax returns, and the IRS publishes an annual instruction book to assist taxpayers. In the IRS Form 1040 instruction book, the IRS states the tax system is voluntary. Similarly, in Flora, the Supreme Court noted: “Our system of taxation is based upon voluntary assessment and payment, not upon distraint.” The IRS has clarified that in both Flora and IRS publications, any reference to a “voluntary” taxation system means that taxpayers may determine the correct tax, rather than having the government determine the tax amount. In other words, the “voluntary” system does not mean that citizens can choose not to pay taxes.

Other tax protestors have falsely asserted there is no law requiring the payment of federal income tax. Section 1 of the Internal Revenue Code clearly imposes a tax on the income of individuals, estates, and trusts. The obligation to pay income tax is set out in the Internal Revenue Code, and in numerous court decisions.1

“The 16th Amendment was never ratified.”

Tax protesters frequently target the 16th Amendment, which gives the federal government power to require citizens to pay income tax. A common argument is that this amendment was never properly ratified, making income tax unconstitutional. Tax protesters may also insist that courts have never squarely addressed this issue. Both claims are provably false.

Under Article V of the U.S. Constitution, three-fourths of the states are required to ratify any Amendment to the Constitution. The 16th Amendment was ratified by 40 states initially and then by two additional states at a later date. Tax protesters contend that Ohio, which ratified the 16th Amendment, was not a state on the date of ratification. Even ignoring that Ohio was given status as a state retroactive to 1803,2 the 16th Amendment would still meet the three-fourths requirement to ratify an Amendment without Ohio. Courts have repeatedly rejected the argument that the 16th Amendment was not properly ratified as “totally without merit.”3

“Taxation violates my religious or moral beliefs.”

A less common—but equally creative—argument is that an individual can refuse to pay federal income tax for religious or moral beliefs. These individuals believe that paying federal income tax would be endorsing government actions, which they contend violates their First Amendment rights. The First Amendment, whether through free speech or religious liberty, does not protect against paying taxes, even when the government is doing something with which a person might disagree. As the Supreme Court explained in U.S. v. Lee, “[b]ecause the broad public interest in maintaining a sound tax system is of such a high order, religious belief in conflict with the payment of taxes affords no basis for resisting the tax.”4 This same argument extends to moral objections to the government’s activities.5 For example, a pacifist’s moral belief that war is wrong would not be a sufficient reason to avoid paying taxes that might be used to fund wartime activities.6

While these arguments are simple to overcome, they are far from the only arguments that tax protesters use. It is recommended not to respond to every case a tax protester presents. Instead, focus on what your company is obligated to do about the tax protester at the company.

Tax Protester Tactics and How to Respond to Them

There are numerous tactics tax protesters might try to use to convince their employer to not withhold their income tax. While failing to provide a W-4 is one method, tax protesters may also attempt to pass off a modified W-4 containing false information, or may provide an inappropriate alternative to a W-4.

IRS Publication 15, known as Circular E, guides employers on what to do if an employee provides no W-4. According to this document, if your employee refuses to provide a W-4 tax withholding form and you have no valid previously submitted W-4, you must tax the individual as a single adult with no withholding allowance. This instruction means that tax protesters, no matter the withholding allowance to which they are otherwise entitled, will be taxed at the highest rate possible for their income bracket.

Simply not providing a W-4 is not the only method a tax protester can attempt to use to avoid income tax. Circular E identifies several ways to identify an invalid W-4 form. The most obvious indicator of an invalid W-4 is information the employee overtly admits is false. For example, employees may tell you that they object to using a social security number and are going to place a false social security number on line 2 of the W-4 form. In that instance, the IRS again requires employers to withhold from employees as though they were single with no withholding allowances.

There are less obvious ways to make a W-4 invalid, however. If the employee entered any number on line 5 for claimed allowances, or an amount on line 6, which is for withholding additional income, and then wrote “exempt” on line 7, the W-4 is invalid. Further, if the employee makes any additions or changes to the W-4 form itself, the W-4 form is invalid.

Not all tax protester strategies are limited to the W-4 withholding form. Tax protesters may submit documents, including non-official tax forms, which suggest they are of a classification that can avoid income tax. One such non-official form is called a W-4T, or a “Voluntary Withholding Agreement.” This form asserts that the employer must cease using the employee’s W-4 and not withhold income tax from the employee’s pay. While it appears official, the W-4T is not issued or recognized by the IRS. Documents like the W-4T may fool an employer into not withhold income tax, opening the company up to unwanted penalties. Your company should closely examine any forms given provided by employees who refuse to utilize a W-4.

Dealing with potential tax protesters at your company can be – dare we say it? Taxing. You might be tempted to avoid the issue altogether simply by not withholding income tax from their pay, but this course of action is unwise. The IRS requires employers to withhold federal income tax from their employees’ paychecks.7 If income tax is not withheld, employees will be subject to a penalty equal to the unpaid tax.8 Employers that do not adequately tax their employees are also held responsible for the same tax penalty to which the employee is subject. Employers found to have willfully failed to withhold the necessary taxes could be subject to a maximum $10,000 fine, up to five years of imprisonment, or some combination of both.9 Given the potential serious repercussions, acquiescing to the tax protestor’s will is impractical and risky for any business.

We hope the information above helps you feel more confident that common tax protester arguments are faulty, and that you have a better idea of how to respond.

See Footnotes

1 26 U.S.C. § 6151; see also United States v. Drefke, 707 F.2d 978 (8th Cir. 1983) (“The Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the appropriate rate of income tax.”); United States v. Schiff, 379 F.3d 621 (9th Cir. 2004) (defendants found guilty of selling a tax scheme that fraudulently claimed federal income tax was voluntary).

2 920 F. Supp. 623 n.1 (E.D. Pa. 1995) (outlining the odd timeline of events around Ohio’s admission into the union).

3 Knoblauch v. Commissioner of Internal Revenue, 749 F.2d 200, 201 (5th Cir. 1984), cert. denied.

4 455 U.S. 252, 260 (1982).

5 If you are interested in other odd arguments tax protesters have made to avoid tax liability, the IRS created a guidance document on those arguments and why they are false.

6 Internal Revenue Service, The Truth About Frivolous Tax Arguments (March 2014), available at also United States v. Ramsey, 992 F.2d 831, 833 (8th Cir. 1993). While the pacifist belief in Ramsey is stated to be a religious pacifist belief, it still lends itself to the notion that pacifist moral beliefs are insufficient to avoid taxation.

7 26 U.S.C. § 3402(a)(1).

8 26 U.S.C. § 6672(a).

9 26 U.S.C. § 7202.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.