Originally Published on forbes.com on April 8th, 2012
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I recently wrote about the Browns whom Ron Paul likened to Mahatama Gandhi and Martin Luther King for their courageous stand against the income tax. I think they had more guns than Gandhi and MLK, but that is a detail. Mr. Brown kept saying “Show me the law”. That challenge gave me a bout of existential terror. It would be kind of embarrassing for me to realize that over my career I have told people to pay over millions of dollars in the aggregate that were not required. I satisfied myself on that point but then JJ MacNab pointed to a site that nicely outlines the source of the law that requires U.S. persons to pay income tax. It is titled “Here is The Law That Makes The Average American Liable For the Income Tax“ There is one concession to the protesters that the authors make:
Over the years and out of literally thousands of tax protesters who have been criminally prosecuted, a very small handful have won acquittals in their criminal trials, by convincing the jury that they were too stupid to understand that they had to pay taxes.
People who win on what is known as the “Cheek defense” can still have their property seized and the like. They just don’t get an all expense paid vacation at Club Fed. The Cheek defense is a little challenging though. You have to have some intelligence to convince people you are stupid, but you cannot have too much.
Recently Joseph Maga was complaining to the Sixth Circuit that the lower court erred in letting the federal prosecutor convince a jury that he was smarter than he thought he was. The Sixth Circuit complimented him on his intelligence by upholding his conviction. Here is the story:
Several years ago, Maga obtained copies of his “individual master file” transcript (also known as an “IMF transcript” or a “specific transcript”), a technical record that the IRS uses to keep a running account of all of a person’s tax events—e.g., penalties assessed, refunds owed, refunds issued, and interest. He noticed that the code “MFR-01” appeared on each of his IMF transcripts. Unsure of the meaning of this code, he wrote to the IRS about it. An IRS disclosure officer replied via letter that the code meant “1040 not required.” Based on this letter and his reading of IRS manuals on the Internet, Maga claims he interpreted the code to mean that he was “not required” to file any returns.
The IRS’s records revealed that Maga stopped filing tax returns in 1996, years before he received the letter from the disclosure officer. When the IRS sent a levy notice, Maga requested a collection due-process hearing, purporting that he did not need to file tax returns. A grand jury indicted Maga for failure to file a federal income tax returns between 2002 and 2006—five counts in all. It also indicted Maga for four counts of tax evasion.
That cross-examination revealed that Maga, in his request for a collection due-process hearing, claimed that he did not need to file a return and, by way of explanation, attached the letter from the IRS disclosure officer explaining the meaning of MFR-01. Keegan read this letter to the jury, which concluded with the statement, “n addition, is not an official determination by the internal revenue service as to whether or not tax payers are required to file a return.”
The jury did not buy into Mr. Maga’s sincerity and the Court ruled they were being reasonable.
When viewed in a light most favorable to the government, the record permits a factfinder to conclude, beyond a reasonable doubt, that Maga actually knew about his legal duty to file and only pretended to rely on an idiosyncratic reading of the IRS letter and documents
Furthermore, a reasonable jury could decide that an individual wily and meticulous enough to cull the finer points of the IRS’s tax practices in search of a loophole—sending a Freedom of Information Act request, demanding explanations of the internal code, poring over manuals—could not have been so inattentive as to actually misunderstand the IRS letter’s meaning. The IRS letter and documents explain that the MFR-01 code, generally speaking, serves two different functions: indicating the type of forms the taxpayer must file and the type of forms the IRS must send. The letter does not state which of the two functions the code served in Maga’s case (or whether the code indeed served both functions at the same time). And a reasonable jury could disbelieve that the same individual who carefully dissected the IRS letter’s meaning with regard to MFR-01 actually failed to notice the express warning, just two or three sentences later, that an individual’s code may change with time and that “ is not an official determination by the internal revenue service as to whether or not tax payers are required to file a return.”
Furthermore, a reasonable jury could decide that an individual wily and meticulous enough to cull the finer points of the IRS’s tax practices in search of a loophole—sending a Freedom of Information Act request, demanding explanations of the internal code, poring over manuals—could not have been so inattentive as to actually misunderstand the IRS letter’s meaning. The IRS letter and documents explain that the MFR-01 code, generally speaking, serves two different functions: indicating the type of forms the taxpayer must file and the type of forms the IRS must send. The letter does not state which of the two functions the code served in Maga’s case (or whether the code indeed served both functions at the same time). And a reasonable jury could disbelieve that the same individual who carefully dissected the IRS letter’s meaning with regard to MFR-01 actually failed to notice the express warning, just two or three sentences later, that an individual’s code may change with time and that “ is not an official determination by the internal revenue service as to whether or not tax payers are required to file a return.”
Maga exerted every effort to verify that MFR-01 meant “1040 not required,” yet made no effort to double-check his convenient inference of complete tax exemption. Given Maga’s attitudes toward taxes, his familiarity with the IRS letter and manual, the “plainly incredible” nature of his interpretation, and the absence of any attempt to verify the accuracy of his risky interpretation, a factfinder could conclude beyond a reasonable doubt that Maga willfully disregarded his known duty to file returns.
The “secret computer code” argument has actually been kicking around for quite a while. I heard about it in the mid-nineties from a former friend who I was hoping to rescue from that nuttiness. Here is something on it from someone named Frederick Mann, who appears to be still active in the field:
Further, I have filed with the IRS a Freedom of Information Act request for all files they have on me. I am aware that there are certain codes in their files which indicate whether or not one is liable for the graduated income tax. (Hint: Code MFR-01 means you are not required to make or file a return). If the IRS ever decides to take me to court, those codes would be powerful legal ammunition.
Well Mr. Mann’s powerful legal ammunition turned out to be a blank for Joseph Maga. The problem with the “secret computer code” defense is that if you are smart enough to execute it, you are not stupid enough for the Cheek defense to work.
Jack Townsend’s Federal Tax Crimes also has a piece on this case that explores the legal niceties.You can follow me on twitter @peterreillycpa.