Global Policy Forum

By David Cay Johnston

Al Thompson squeezed most of his manufacturing company's 28 employees into a conference room here in October to say he had good news: Income taxes must be paid by only a few Americans, mostly those working for foreign-owned companies. So, he told the workers, they would not have to pay income taxes ever again. His business is exempt, too, he said. No Social Security or Medicare taxes, either. The company was no longer withholding taxes from their paychecks, he said, or telling the Internal Revenue Service how much they made.

Mr. Thompson is part of a tiny but increasingly flamboyant fringe of American business. Arguing that the federal tax laws do not apply to them, these small companies are thumbing their noses at the I.R.S. in a very public way: they have not only stopped withholding taxes and turning them over to the government, they are also bragging about it on Web sites and radio talk shows, and organizing seminars to promote the gospel of defiance. And they are boasting that they must be right because the I.R.S. has not come after them, even though it knows what they are doing. Mr. Thompson noted that he had not sent a weekly tax payment to the I.R.S. since July, yet "I have not been drug off to jail."

Indeed, the I.R.S. has not only failed to pursue these businesses, it has in some cases given refunds after they claimed they did not owe taxes paid earlier. In at least two cases, the businesses say they even received apologetic letters from the I.R.S. for not rescinding penalties and issuing the refunds sooner. Many tax experts express astonishment at the idea that the I.R.S. is aware that legitimate businesses are cheating yet has not even written to ask why their tax payments stopped, let alone begun action to make them pay. This undermines the principle on which the American tax system is based, they say: people who do not pay their taxes will pay the consequences.

How many businesses are taunting the I.R.S. this way is impossible to know. At least 23, including Mr. Thompson's aviation products company, a Florida marketing firm and a Texas plastics company, have made their decisions public. Sixty business owners and their advisers met on the weekend of Nov. 11 in California to plan how to persuade thousands of others to join them. Over the years, a number of individuals have claimed to be out of reach of the tax laws, but experts, including four former I.R.S. commissioners, said this case was different. "This is tremendously significant because we have never before had responsible parties — employers — refuse to withhold," said Sheldon Cohen, a former I.R.S. commissioner. "The system simply cannot work if they get away with this."

The I.R.S. declined to comment on whether it was pursuing enforcement actions against the 23 employers, citing a law that protects taxpayer privacy. But there is no public record showing litigation or enforcement actions like liens against the companies' assets. The failure of the I.R.S. to act even against those who openly defy the tax laws raises questions about the agency's ability to stop tax cheating. Asked whether the I.R.S. was moving against any such tax resisters, the senior I.R.S. spokesman, Frank Keith, would say only that "with limited resources the I.R.S. must often choose which cases to pursue" and that it focuses on those that will generate the most revenue.

But Jerome Kurtz, another former commissioner, disagreed. "That's a nice pat line," he said, "but they don't go after only the people with the highest income. They audit hundreds of thousands of returns under $25,000 that produce little or no revenue — and they can take resources from those."