Taxes are Illegal?

The man sitting across my desk had been a client for years. He had come in to tell me that he would not be using my services ever again.

“Why?”, I asked.

He had found a lawyer who had told him that income and social security taxes were illegal. All my former client needed to do was file some forms with the government and he would effectively “untax” himself.
“Anyone can do it,” my client told me. “It is just that the government has everyone believing that taxes are required. All you need to do is file the proper forms, and you won’t ever have to pay taxes again. And it is perfectly legal.”

Unfortunately I never saw him again so I have no idea how the whole scheme worked. But every year I have people tell me that taxes are illegal, or unconstitutional, or only for corporations. And every year I tell them that the IRS has said over and over again that taxes are legal, and constitutional, and for everyone with income.

I was looking at a website today, that will sell you a package to “untax” yourself for the small sum of $700. The package will include all the forms you need to send to the government so you will never have to pay income taxes or social security taxes again.

Judging from the page and pages of double speak, the main argument of this website, is that paying taxes is voluntary. They also state that the 16th amendment was never properly ratified, and that wages are not taxable because they are not defined as “income” in the IRS tax code.

Before you fall for this type of scam, please take a moment to read what the IRS has to say about these frivolous tax arguments(pdf file).

If you don’t like reading IRS documents I’ll sum it up for you here. Taxes are legal, the 16th amendment was properly ratified, and wages are income under the law. You can’t avoid taxes by declaring you are not a citizen, by filing any type of “untaxing” paperwork, or by submitting a zero income tax return.

If you choose to use any of these arguments on your tax return the IRS can impose a $5,000 penalty for preparing a frivolous tax return in addition to any other fines or penalties that may be due for underpayment of tax and failing to file a tax return.

The Top Tax Protester, Where Is He Now?

Irwin Schiff is arguably the most prominent tax protester in the United States. He is the author of two books, has presented seminars and appeared on national television promoting his ideas about the legality of the income tax. Most if not all of the tax protester arguments you will hear today originated with Irwin Schiff.

Today Irwin Schiff is a guest of the United States government, serving over 12 years for his 2005 conviction for filing false tax returns, assisting in the preparation of false tax returns filed by other taxpayers, conspiring to defraud the United States, and income tax evasion. He has also been ordered to pay over $4 million in back taxes, fines and penalties.

If You Told People The Truth About Income Taxes You Would Be Out Of A Job

I can’t tell you how many times I have had people tell me that I must know that paying taxes is illegal, and the only reason I don’t tell people is that I would be out of a job. If only it were true. The truth is, if I knew a way that people could legally earn income without paying taxes, I would be more than happy to share it with all my customers, and I am sure they would be more than happy to pay for that information. In fact, I would be the most popular tax adviser in my state.

Buy a New Car With Help From The IRS

Now is a great time to buy a new car. The recession has hit the major car dealers hard and they are offering great deals on new cars. And to make the deal even getter, the IRS is allowing a deduction on your 2009 income taxes for state and local sales and excise taxes you pay when buying a new passenger car.

There are a few qualifications.
The deduction is only good for purchasing a new car, light truck, motor home or motorcycle. Taxes paid on the purchase of a used car will not be deductible.
You must purchase the new car after February 16, 2009 and before January 1, 2010.
You can only deduct the taxes paid on purchase prices up to $49,500. This doesn’t mean that you can’t deduct the taxes if you buy a more expensive vehicle, the deduction is just limited to the taxes on the first $49,500 that you pay.
The deduction will start to phase out if your income is over $125,000 and you are a single filer, $250,000 for joint filers.
The deduction is only good for your 2009 income tax return.
You don’t need to itemize to be able to take the deductions.

How will this work for you? Well, lets say you purchase a $30,000 vehicle and you pay 10% in state, local and excise taxes, or $3,000. You will get to deduct $3,000 from your taxable income for 2009. That will save you $450 if you are in the 15% bracket and $750 if you are in the 25% tax bracket.

Not enough to make me run out and buy a new car, but not a bad deal if you are going to buy one anyway!

Don't Pay Off Your Credit Cards! – Not This Foolish Way

It should be clear by now, that here at Money, Debt and Taxes we are big fans of paying off your credit cards.  But when it comes to paying off your debt, it is amazing how much bad advice is out there, even from trusted sources.

Recently I came across an article on The Motley Fool website titled “9 Ways to Pay Off Debt”.  As I read through the article I was screaming at my computer NO, NO DON’T DO THAT!   So here is an abbreviated version of the Motley Fools’ suggestions, and my not so humble comments.

#1. Pay More Than The Minimum Payment on your Credit Cards
So far, so good. I have no problem with this suggestion.   Unless you pay more than the minimum payment it could take you 10 years to pay off your credit card debt.

#2. Snowball Your Debt Payments
Still OK, in fact I am a big fan of debt SnowBalling.  You can read more about debt snowballing at Wipe Out Credit Card Debt.

#3. Cash Out Your Savings Account
WHAT! Excuse Me? Is this the Motley Fool, or some hack. Why would you do that?  The argument the Motley Fool gives is that savings accounts pay a very low interest rate.  You “earn” a better rate of return by paying off a higher interest rate credit card, than you do by leaving that money in a savings account paying a lower interest rate. From a strictly numbers point of view that might be correct, but from a “learning how to manage your money” point of view that is a terrible suggestion.  What do you do if your car breaks down and you don’t have an emergency account?   An emergency account is an essential if you want to get out of debt forever.

#4. Borrow Against Your Life Insurance
I can’t tell you how many ways this is wrong.  First, this is not a way to pay off debt. This is a way to transfer debt.  Second, you can’t borrow against a term life insurance policy, so the Fool is assuming that you have a whole life policy. So you are going to borrow against your life insurance, you may not ever pay it back, so your beneficiaries will get less than you paid for.  I am not fond of whole life insurance, but this just seems like one way to make a bad investment even worse.

#5. Finagle Family and Friends
The idea is you borrow money from family and friends to pay off your other debt.  Once again, you are not paying off your debt, you are changing your creditor.  This has to be one of the worst suggestions of the bunch.  Money issues can be deadly for friendships and devastating for families.  Don’t ever borrow money from friends or family.  Not if you want to keep your friends and stay on good terms with your family.

#6. Get A Home Equity Loan
Sigh, once again we are trying to solve our debt problem by getting more debt.  Plus, we are changing unsecured debt for secured debt.  If you don’t pay off your credit cards you can ruin your credit rating. If you don’t pay off your home equity loan, not only do you ruin your credit rating, you can lose your house.

#7. Borrow From Your 401(k) Plan
Do I sense a theme here?  Are we paying off debt, or are we just moving it?  I know, if it is good enough for the US government it is good enough for you. So if you borrow from your 401(k) plan, what is to stop you from just running up your credit cards again?   Now, if you have been following all this foolish advice, you have tripled your debt, alienated all your friends and family, lost your home, and now you have no money for retirement. (Plus you’ve lost many of the tax benefits a 401(k) plan provides.)  But that is OK, the fools have a plan for you…

#8. Renegotiate With Your Creditors
Yes, your creditors will love you when you call them up and say you can’t pay.  They will be so excited to lower your interest rate and maybe even forgive some of the principal.   You could even call one of those “Secrets The Credit Card Companies Don’t Want You To Know” companies and totally destroy your credit rating.  But that won’t matter, you have to fools to advise you.  Next step please…

#9. File For Bankruptcy
News Flash, this is not paying off your debt!   This is forcing your creditors to accept little or nothing for the debt you have incurred.  In very rare circumstances, bankruptcy is the only option, but for most people, learning how to manage their money will enable them to pay off their debt, save their credit rating, and avoid bankruptcy.

I am afraid I have lost a whole lot of respect for those Motley Fools.   Of their 9 Ways to Pay Off Debt, only 3 are actually ways to pay off debt,  4 just transfer the debt to a different creditor, and 2 involve forcing your creditors to accept less than you owe.

As one commenter mentioned, paying off your debt is really simple.  There is no magic formula.  You just need to do two things.  Make your debt payments, and pay for everything with cash.  Whatever you do, don’t be a fool and follow the advice of the Motley Fool.

If you are serious about getting out of debt I highly recommend Dave Ramsey’s Book The Total Money Makeover. It helped me to become debt free and has changed the financial future of thousands of people.

What To Do When You Can’t Pay Your Taxes

April 15th has arrived, and you don’t have enough money to pay your taxes.  What are you going to do?

First of all, don’t panic. You are not alone. Every year thousands of people come up short when it comes time to pay the IRS.   Here is what you can do when you can’t pay your taxes.

First of all, file your tax return on time.  Pay whatever you can with your tax return.   This way you won’t be subject to the failure to file penalty, which can be as high as 25% of the tax due.  If you won’t have your tax return completed by Apirl 15th, you can file an extension.  But the extension is just and extension of time to file, not an extension of time to pay.

If you know you will be able to pay your taxes within the next few months, you can file and extension with a payment, and then file your tax return and pay the rest of your tax bill at that time. You will still be subject to interest and penalties, but you may be able to avoid the  convenience fees that come with paying your taxes by credit card, or the set up fee the IRS charges for an installment agreement.

But if you have a  really large tax bill, one that might take years to pay off, you are going to have to accept the fees and either  pay your taxes with your credit card, or you can request a payment plan (also known as an installment agreement) from the IRS.

To pay your taxes by credit card you need to go through an authorized payment company.  They will charge you a convinience fee, which is around 3% of the amount that you are paying.  You can find out more about paying by credit card here.

If you can’t or don’t want to pay your taxes by credit card, you can request a payment plan from the IRS. If you owe less than $25,000 and expect to be able to pay your taxes within 3 years your payment plan will usually be accepted. The IRS will charge you a user fee of $105.  You can get the fee lowered to $52 if you have your payments automatically debited from your bank account.  Low income taxpayers may qualify for an even lower fee. You can apply for an installment agreement online here.

Once you have your current taxes taken care of you need to make sure that you are not in the same boat next April 15.  If you are self-employed you will need to pay more with your quarterly estimated tax payments. If you are an employee, you need to ask your employer to withhold more taxes from your paycheck. I know it hurts, but that is the only way to avoid owing next year.

How To Get Out of Debt – Debt Free Forever

This is the fourth post in a series that will explore how you can become debt free, and stay debt free forever. Future posts will talk about when you should and should not use credit cards for purchases. Why you should care about your credit score, how to save money on every day expenses, will credit repair companies help you or hurt you and much more. Make sure to subscribe to our feed so you don’t miss a single installment of this series.

So it has been awhile since my last post on how to get out of debt and stay debt free forever. How have you been doing? Have you paid off a credit card yet? Have you managed to go a month, a week, or even just a day without using your credit card? If not, don’t worry. It takes time to change your spending habits. Just keep trying, eventually it will all come together for you.

In my last post, The Credit Card Payoff Plan, I gave you a plan for paying off debt when you have a little extra cash each month. But what do you do if you don’t make enough money to meet all of your expenses? What do you do if you need to use your credit cards just to pay your bills? How do you manage to pay off your credit cards if you don’t have enough to make the minimum payments each month?

First you have to realize that you are in serious financial trouble. And it is going to take some major changes in how you deal with money to get yourself out of it. You must really commit yourself to getting out of debt. It is not going to be easy. However, you can’t just keep ignoring the problem. The longer you let it go on, the worse the problem will get.

Do not be tempted by payday loans and other such offers of easy credit. These types of loans have high fees and interest rates and are set up so that you will just get yourself deeper in debt, and pay more fees to the payday loan company. The more money you have going to fees and interest, the less money you have to pay off your debt!

Sometimes the only answer will be bankruptcy. And when you are deep in debt, bankruptcy can seem like the easy way out. After all, to be able to walk away from all your debt, and all your money problems can be very appealing. But understand, that unless you change how you manage your money, you will soon find yourself deep in debt again. Also, bankruptcy will damage your credit score. This affects you not just when you are trying to get a mortgage or a car loan. Auto insurance companies will charge you more for your car insurance if you have a bad credit score. You may find it difficult to rent a house or an apartment, and with many employers looking at credit scores, you may even find it hard to find a job. If at all possible you should avoid bankruptcy and work to pay off your bills.

You will also hear many companies advertise that they can negotiate with your creditors and settle your debt for pennies on the dollar. Don’t believe it! Often these companies are scams. They will ruin your credit and run away with your money. For more information on these companies read my post on Secrets the Credit Card Companies Don’t Want You To Know.

There are legitimate credit counseling companies that can help you work out a budget, and a payment plan that you can afford. They will talk to your credit card companies and get you a little breathing room. But you are still going to need to pay off the debt. You can find legitimate credit counseling companies and more information on debt at The National Foundation for Credit Counseling.

So, if you don’t want to declare bankruptcy, and there are no secrets that will make the credit card companies happily settle for less than you owe them, what are you to do? There are only two ways you are going to get out of your financial mess. You need to spend less money and/or make more money.

I can hear you already. I know you think there is no way you can cut back anymore, there is no way you can make more money. And I am going to tell you, that you are probably wrong. Almost everyone I helped get out of debt thought there was no way they could spend less or earn more. And with only one exception, they were all wrong! Sometimes they had to make some dramatic changes. One person sold their large home and moved into an apartment. Others have realized they didn’t really need that second car, they could live without a cell phone, and that cable television is a luxury! You need to look at every place you spend money and find a way to spend less. The more money you can put to paying off your debt, the sooner you will be able to add back those extras in life that most people consider necessities. In my next How To Get Out of Debt post I’ll go into more detail on how to make dramatic cuts in your spending.

Along with cutting back your expenses, you are going to need to make more money. In some ways this can be easier than cutting back on expenses. By taking a second job, or starting a part time home business, you may be able to keep some of your comfort items and still pay off your credit card debt. But please don’t be taken in by any of the get rich quick scams. You don’t need to spend money to find out how these make money schemes work. Use free sources like the internet and your local library to learn about legitimate ways to earn extra money. You can also take a look at my Work From Home Blog to learn about legitimate work from home opportunities. Don’t overlook the little ways to make some money. A weekend spend picking up aluminum cans from the side of the road might net you enough to make a minimum payment on one card. And don’t think of it as just earning enough to make the payment. You are also saving late payment fees and interest. In a later post I’ll talk more about ways to bring in a little extra money.

So to sum it all up, if you are in the position where you don’t have enough money to make even the minimum payments on your credit cards, you are in serious financial trouble and you will need to make dramatic changes to get yourself back on the right track. Finding ways to drastically cut expenses, and ways to make more money will enable you to pay off your debt, and get to the point where you can live Debt Free Forever!

Free Tax Preparation This Saturday

The IRS is calling this Saturday, March 21, 2009, Super Saturday and is offering free tax preparation for people earning less than $42,000 per year. There are over 250 Taxpayer Assistance sites, and hundreds more community sites where trained volunteers will prepare your Federal income tax returns for free.

You will need to bring all your tax papers with you, including social security cards for everyone on the tax return, a photo ID for the taxpayer (and spouse if married), and all your income and expense paperwork.

This is also a good time to get help from the IRS if you can’t pay your tax bill, or if you have other unresolved issues with the IRS. Whatever your income, on Super Saturday, you can go to any of the IRS sites and set up a payment plan to pay your tax bill, or talk to an IRS representative about your tax problems. The IRS says it is committed in these tough times to make it easier for tax payers to pay their taxes.

To find out where you can have your taxes prepared for free, visit the IRS Website.

Over $1 Billion in Refunds Available

Have you filed your 2005 Income tax return yet? That is not a typo, I am asking about your 2005 tax return, not your 2008. The reason I am asking, is because I don’t want the IRS to be able to keep over a billion dollars in uncollected refunds. (Of course, used right that might make a small dent in the national debt.)

According to the Internal Revenue Service over 1 million people who may be due refunds did not file a 2005 tax return. The average estimated refund is over $500. If all of those people do not file a 2005 tax return by April 15, 2009, the IRS gets to keep the money. That would be a shame. I am sure you can put the money to better use than the IRS can.

Many of these refunds are due to people that had tax withheld from their paychecks, but didn’t make enough money to require a tax return. Lower income tax payers may also qualify for the Earned Income Credit which could make their refunds even larger.

So if you didn’t file a 2005 tax return because you didn’t think you needed to, you might want to look into it. What is really nice is that the IRS can give you information on how much was reported to them in income and withholding, so you don’t have to dig through all your old papers trying to find your 2005 W-2’s. But you do need to hurry. Your 2005 tax return must be filed by April 15, 2009, or the IRS gets to keep the money.

You can get current and prior year tax forms and instructions on the Forms and Publications web page of or by calling 1-800-TAX-FORM (1-800-829-3676). Information about the Earned Income Tax Credit and how to claim it is also available on Taxpayers who need help also can call the toll-free IRS help line at 1-800-829-1040.