When I was in college, my friend and I attended a tax seminar in which we were told that paying taxes was unnecessary because the Sixteenth Amendment—empowering Congress to levy an income tax—was never legally ratified. After a long and detailed history of the irs, we were advised not to file a tax return and given instructions on what to do and say when the feds come a-knockin'. The slick presentation seemed internally coherent and logically plausible in the room, but later, after some reflection, I figured it couldn't possibly be true because no one would pay taxes if it were. In contrast, my friend went for it and got away tax-free for years, until the irs caught up with him and he got his comeuppance.
I was thinking about this incident in August, when I appeared as an expert witness on the psychology of why people fall for such schemes in a Portland, Ore., court in the case of USA v. Miles J. Julison, a house flipper who neared financial ruin after the housing-market meltdown. That year he reported $583,151 in “other income” to the irs on his tax return, claiming that the entire amount was withheld as income taxes. Submitting eight irs 1099-OID (Original Issue Discount) forms, Julison requested a refund of $411,773. (According to the irs, an “OID is a form of interest. It is the excess of a debt instrument's stated redemption price at maturity over its issue price.”) The irs sent him a check in that amount, which he spent on a home loan, personal debts, a car and a boat. Emboldened by his success, the next year he demanded a refund of more than $1.5 million. This time, however, instead of a refund check he got a trip to court and, after a guilty verdict, jail.
This particular tax scam is popular among tax resisters with a conspiratorial bent, especially those who call themselves sovereign citizens, who hold that the U.S. government is actually a corporation, not a country, and that there is a secret account bearing, say, $1 million for every child born in the U.S. Sovereign citizens believe that this money should be “redeemed” to them and that the 1099-OID is one tool among several to get it. Sovereign citizens believe that they are not subject to federal jurisdiction, do not recognize government currency (gold is popular among such far-right groups) and, of course, that taxation is illegitimate. The fbi labels them a domestic terrorist threat, and the Southern Poverty Law Center estimates there are about 100,000 “hard-core sovereign believers.”
As a self-proclaimed sovereign citizen, Julison did not recognize the court's right to try him and refused to work with his court-appointed lawyer, who urged him repeatedly to plead guilty for a reduced sentence in the face of overwhelming evidence against him. Instead, as it shows in court records, he kept repeating variants on “I, Miles Joseph, a bond servant of Jesus Christ, can only take an oath to Jesus Christ, as he has bought and paid for me by the blood of the lamb. And anything else, any other oath would violate the religious dictates of my conscience. And I continue to reserve all of my rights without prejudice.”
During a lunch break, when we were alone, I asked Julison if he really believes all these sovereign citizen claims or if he was just in it for the money. “The United States is a corporation in the state of Delaware. I have their registration papers printed right off their Web site. Before anything can be argued, there has to be a jurisdiction established,” he responded. “So my description of you as a true believer is true?” I queried. “I believe in the blood of the lamb,” he responded biblically.
A number of social and psychological factors are at work in the creation of a true believer, most notably the authority of a leader, the influence of others engaged in the scheme and especially the reinforcement by the government itself in the form of a refund check. The take-home lesson is that if it sounds too good to be true ... leave it off your tax return.