Episode 685: Larry vs. The IRS : Planet Money A lot of people dream of not paying their taxes. Larry Williams scoured the fine print of IRS code, talked to lawyers, settled on a plan, then just stopped paying taxes.
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Episode 685: Larry vs. The IRS

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Episode 685: Larry vs. The IRS

Episode 685: Larry vs. The IRS

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DAVID KESTENBAUM, HOST:

Larry Williams has a lot of stories.

KEITH ROMER, HOST:

There was his quest to find Noah's Ark - he didn't find it.

KESTENBAUM: There's the time he ran for U.S. Senate in Montana. Didn't win, but he got 44 percent of the vote.

ROMER: And then there's the one we're going to tell you today. It starts in 1986. Larry and some of his buddies are up in New Mexico's Caballo Mountains. They're hanging out in the sagebrush, camping in tents. And then one night, he says they're all sitting around the campfire.

LARRY WILLIAMS: We started talking, as guys do, talk around a campfire about a lot of things. And nobody really enjoys paying taxes - that's no surprise. And the question came up.

KESTENBAUM: The question - do you really have to pay your income taxes? Larry had heard about these people who had found legal ways not to pay at all.

ROMER: As it happened, one of the men sitting around that campfire was a lawyer, a man named Jim Knowles.

WILLIAMS: I asked Jim about it. And Jim said, well, this is, you know - this all b.s. this, you know - you have to pay your taxes. Said well, you're a lawyer. Look into it.

KESTENBAUM: The lawyer, Jim, was a respectable guy, active in his community and his church, total straight shooter. And he says - sure, I will look into this for you.

ROMER: Larry didn't hear anything for a while. Then one day, he gets this call. It's Jim, the lawyer, saying - can I come by and talk to you?

KESTENBAUM: Larry says sure.

ROMER: Jim comes by and explains he's pretty sure he's found a hole in the tax laws - a hole so big that Larry and whoever else wanted to could just walk right through.

KESTENBAUM: When he told you that, did you think - maybe I don't have to pay income tax?

WILLIAMS: Yeah, course I did. I mean, here's a lawyer - (intelligible) law school lawyer. You know, he's been a lawyer for 45 years or so - a very presentable guy - yeah.

KESTENBAUM: And that is how Larry Williams decided to stop paying his income tax.

ROMER: Hello and welcome to PLANET MONEY. I'm Keith Romer.

KESTENBAUM: And I'm David Kestenbaum. Nobody likes paying their income taxes. We all take as many deductions as we can.

ROMER: Some of us go further - you know, round down, maybe leave a few things out.

KESTENBAUM: And then there are people like Larry Williams. He took this very understandable impulse to pay as little as possible and went just as far as you could go - decided he wasn't going to pay at all.

ROMER: Today on the show, the story of Larry Williams - and an answer to the question.

KESTENBAUM: Do you really have to pay your income tax?

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KESTENBAUM: When Larry Williams decided to stop paying his income tax, he was working as a commodities trader and an investment advisor giving talks. He was making a really good living. He could certainly afford to pay taxes.

ROMER: Taxes that, of course, pay for all kinds of things people want to have in some form - the military, our court system, roads.

KESTENBAUM: We asked Larry about that. Don't you like roads? And he said well, you could pay for roads with tolls. And the other stuff? He said we just shouldn't be spending so much money on all of that.

ROMER: Larry feels like people pay way too much in taxes - sales tax, city tax, state tax, property tax - and then, on top of all of that, federal income tax.

WILLIAMS: When somebody comes and takes 50 percent of my income and don't even have the courtesy to point a gun at me to do it, it's bothersome. Some people, apparently it doesn't bother, go OK. They roll over, and they [expletive] and moan about it, but they don't do anything about it.

ROMER: Larry? He was going to do something about it. Not only was he not going to pay, he was going to use the tax law itself to prove that what he was doing was 100 percent legal.

KESTENBAUM: Larry's lawyer laid out the loophole he said he had found. It went back to the Constitution. There is no mention of an income tax in the original text. It's in the 16th Amendment, ratified in 1913.

ROMER: The 16th Amendment is very short. And on the surface, it seems pretty clear. This is how it starts. (Reading) The Congress shall have power to lay and collect taxes on incomes from whatever source derived.

KESTENBAUM: Does not seem like you have a lot of wiggle room there. But Larry and his lawyer were taking a close look at that word income. What exactly, they asked, did income mean? What - like, what is the legal definition? What counts as income?

ROMER: His lawyer friend Jim had gone back and pulled all these old court cases, all these decisions and said, you know, there's a pretty good legal argument you can make that the federal income tax can only be applied to federal income, like, money paid to you by the federal government - if you had, like, a government job or something.

WILLIAMS: That's called the Internal Revenue Service, so think about that for a moment. Internal - internal to what? If you have an internal investigation, say, at the police station, it's about police officers, isn't it? So internal would be income generated from federal-based revenue. So if you're paid by the government, that would be internal to the United States. If your income is not from the United States government, then it's not taxable.

KESTENBAUM: His lawyer friend also questioned who was legally required to pay this income tax. Sure, citizens of the United States - but according to his reading of the Constitution, U.S. citizenship was basically optional.

WILLIAMS: Your citizenship isn't quite what you and I normally think your citizenship is.

ROMER: Larry thought about all this. And where most people would decide - no way that's crazy - I could end up in prison - Larry thought, let's give it a try.

KESTENBAUM: Wasn't there some part of you that was like - if this is legal, why isn't every single American doing it?

WILLIAMS: Well, that's a question people always ask...

KESTENBAUM: (Laughter).

WILLIAMS: But there's so - you know, 'cause a lot of people don't study it. A lot of people are afraid of the government. A lot of people just roll over. They don't want to test anything. They're not on the edge. I've always liked living on the edge of life. Like I'm - it's more interesting out there, so, to me, it was like - oh, OK. This is interesting. Let's see where this leads.

ROMER: So you felt like you were testing the government?

WILLIAMS: In a way, sure, absolutely. Yeah, we - I mean, we didn't hide anything. Here we are. This is what we're doing. We filed the papers.

KESTENBAUM: Here's what they did. Since, by his lawyer's logic, the income tax should only apply to citizens of the United States, Larry wrote a letter to the state of California declaring that he was a, quote, "sovereign citizen of the state of California."

ROMER: And to make it doubly clear that his personal income wasn't taxable by the federal government, Larry set up something called a pure trust, and he routed pretty much all of his income into that trust.

KESTENBAUM: Ta-da.

ROMER: Now, it wasn't his personal income anymore. Now, the income belongs to that trust.

WILLIAMS: We went down to Bank of America, opened up bank accounts for the trust. You know, we had tax identification numbers and all that stuff.

KESTENBAUM: So you basically paid almost no income tax that year.

WILLIAMS: Correct.

KESTENBAUM: So after you file that, are you are you nervous that someone's going to come after you? Like, how does it feel after you file that?

WILLIAMS: Why would I be nervous? I had advice of two CPAs and a couple lawyers.

KESTENBAUM: We thought, at this point, we should probably check with a third lawyer. So we called one up.

DAN EVANS: My name is Dan Evans. I'm a lawyer. Do want, like, biographical details?

ROMER: Dan has spent a lot of time studying this tax protest stuff.

KESTENBAUM: He got interested in it because there was this whole world of people asking these questions - or at least there was a Usenet group.

ROMER: Usenet was this popular thing back in the early days of the Internet. It was basically message boards where people could post questions or discuss things they were interested in.

KESTENBAUM: And there were a couple of them on taxes.

EVANS: There was a miscellaneous.taxes moderated, which the messages had to be approved by a moderator, and that kind of kept the crazies out. But miscellaneous.taxes was wide open, and I hadn't been there very long before someone posted something very emphatic, very certain about how the income tax was unconstitutional. And he cited cases and the Bruce Haber decision. And I read it, and I thought - you know, I don't remember that from law school.

ROMER: Dan looked into a bunch of these claims. Some seemed totally ridiculous - like this one that Ohio had never officially filed the paperwork to become a state.

KESTENBAUM: What does that have to do with anything?

EVANS: Well, that's the good question. Taft was born in Ohio. And if Ohio wasn't a state, then he shouldn't have been president of the United States, and he could not have ratified the 16th Amendment or something.

ROMER: The 16th Amendment, which provided for the income tax.

KESTENBAUM: Clever.

Another claim was that if you write these three Latin words on your tax form nunc pro tunc, you don't have to pay - not true, by the way.

ROMER: There were ones that were obviously crazy. But then there were ones that took some digging. Dan starts writing up everything he finds online in an FAQ.

KESTENBAUM: Frequently asked questions - those were big back then.

ROMER: Dan's was called the "Tax Protester FAQ."

KESTENBAUM: So I pulled it up online. I thought I'll just print this out so we can have in the studio. And the printer went fricking insane. Like, I thought it was just, like, a couple pages. And it was trying to print out 289 pages. I had to actually unplug the printer.

EVANS: Sorry about that. I guess I should have printed a warning up top, like, do not try to print.

KESTENBAUM: Can you boil all these hundreds of pages down to a sentence? Is there anything to any of these arguments?

EVANS: No.

KESTENBAUM: Dan says that if Larry Williams had come to him and said - I'm thinking about not paying my taxes. He would have said no way. Don't do it.

(Laughter)

(Laughter)

ROMER: But Larry had other lawyers telling him differently, so he filed his sovereign citizenship. And he formed his pure trust, and he didn't pay his income tax. And you know what happened?

WILLIAMS: Nothing happen.

ROMER: And for how long did nothing happen?

WILLIAMS: Oh, maybe three, four years.

KESTENBAUM: So three, four years you go on paying basically no income tax?

WILLIAMS: Yeah, basically none.

KESTENBAUM: How did that feel?

WILLIAMS: Why would it feel bad? It's my money.

KESTENBAUM: Years went by, and nothing happened. Maybe he was onto something. Maybe the IRS did not have a good answer to his legal claims.

ROMER: Or maybe the IRS just hadn't gotten around to dealing with him yet. We reached out to the IRS. They declined to comment on Larry's case, but you can imagine things from their side. Maybe the first year Larry doesn't file his taxes, they don't notice. There's a lot of people filing taxes. He's just one return among millions. But then he does it the next year - and the year after that. If you're the IRS, you're, like, wait - I see what's going on here. Dear Larry Williams...

WILLIAMS: Then the IRS starts writing letters and, of course, Jim would write letters back to their letters. And Jim said oh, that's not a problem - and then the battle really began.

ROMER: The IRS started taking money out of his bank account. Legal arguments back and forth - his lawyer Jim saying don't worry. Don't worry. We have this. And then Jim died - out of the blue.

KESTENBAUM: You know how people feel lost when a friend dies? Larry felt that way. He also was legally lost.

WILLIAMS: You know, I'm on my own here, aren't I?

ROMER: Larry didn't know what to do. He wasn't a lawyer. He tried keeping up with all the letters back and forth to the IRS, but he really didn't know the law.

KESTENBAUM: At some point, Larry decides to make a trip to Australia to give a series of talks about investing. His plane lands at Sydney, and he's sitting there waiting to get off when these three guys get on the plane and walk down the aisle. They stop at his seat. Are you Larry Williams?

WILLIAMS: Well, I go - oh, what is this for? And they wouldn't say anything. They said you're under arrest. OK. And they said well, follow us to this room. And I went down in the basement of this airport - you know, kind of like a holding area and went there. And they said, you know, here are the papers from the United States government. You're being charged with income tax evasion.

KESTENBAUM: The Australian police had arrested Larry on behalf of the U.S. government. Eventually, they take Larry down to a jail in downtown Sydney, where he meets his cellmate.

ROMER: He's a guy with a scar in his side from a bullet wound. Larry tells him - I'm in for tax evasion. Cellmate says I'm in for robbing banks. Larry's like - neat.

WILLIAMS: I'd never met a bank robber before in my life. So I said - well, how do you rob a bank?

KESTENBAUM: Guy says here's how I do it.

WILLIAMS: The trick to robbing a bank - first of all, you need three people. You need one guy to drive the car, one guy to maintain the door to control traffic coming in and out and one guy - me - I'm the jumper. I run in, I yell and swear, I jump over the counter. I grab all the money and run out. You have to do in two and half minutes. If you don't have anything in two and half minutes, you have to leave because that's how - the coppers' response time is about three and half minutes.

KESTENBAUM: Larry gets out on bail after a few days. The U.S. government is trying to extradite him so they can actually get him into a courtroom in the United States. But Larry's, like, I'm not done yet. He hires a local lawyer to help him fight extradition.

ROMER: If you're the IRS, Larry is enormous pain because he's this little guy, but he's costing so much money to try to bring back to the country. Still, the law is the law, and you can't just let him get away with it.

KESTENBAUM: For three years, Larry does get away with it. He lives in Australia. His fiancee flies down. They see the sights, the kangaroos. They dive at the Great Barrier Reef. But at some point, it all starts to feel old.

ROMER: Larry says fine. I will come home. Let the courts decide all this.

KESTENBAUM: What's it like to be extradited?

WILLIAMS: Not fun.

KESTENBAUM: (Laughter).

WILLIAMS: Not fun.

KESTENBAUM: Two marshals shackled him. He says they paraded him through the airport and then sat next to him on the plane all the way home. Something like 15 years after Larry first stopped paying taxes, the U.S. government finally got him in front of a judge.

WILLIAMS: I was charged with income tax evasion, fraud, multiple bank accounts - all sorts of really bad things - you know, that I had defrauded the government, that I was a really bad guy.

ROMER: To give you a sense of what Larry was up against from a legal perspective, we ran Larry's old arguments past the lawyer from before, Dan Evans. They're all in his 300-page FAQ.

KESTENBAUM: First, we asked about the pure trust thing - Larry's routing all his income through a trust.

EVANS: I don't know where to start. I mean, it's - I hate to tell you this, but what you are talking about is pure gibberish. It is nonsense. It is ridiculous. Well, let's start looking at Subchapter J of the Internal Revenue Code, which refers to trusts.

ROMER: Dan goes on for a little while there. Then we tried the one about Larry being a sovereign citizen of the state of California.

EVANS: It doesn't make any difference whether you're a citizen of the United States. If you are within the physical boundaries of the United States, you have to pay federal income tax.

KESTENBAUM: Even Larry had seen the writing on the wall at this point. Before he even appeared in court, he agreed to pay all the back taxes the IRS said that he owed.

ROMER: The question before the judge and jury was whether Larry should go to jail or pay huge fines for what he had done.

KESTENBAUM: Here, we got copies of the transcripts from the trial. The prosecutors go first. They lay out that Larry had not been paying taxes. They point out that he owned two fancy homes. They show all these checks he'd received for, like, $100,000, $150,000, for all his investment lectures.

ROMER: The prosecutor tells the jury this case is about greed, lies, deception and fraud, ladies and gentlemen.

KESTENBAUM: But then Larry's defense lawyer starts making his case, and this part is fascinating. He says - you've heard the statement ignorance of the law is no excuse. That is the general rule. You can't bop somebody on the head or kill them and say I didn't know. But because we are dealing with a special area - complicated, difficult tax laws - in tax cases, if a defendant believes that what he is doing is not against the law, even if his belief is crazy - I will say that again - even if his belief is crazy, if he believes it in good faith, he is not guilty of the crime of tax evasion.

ROMER: I love that you can literally say I didn't know what the rules are, and that can get you off. Our tax laws are that complicated.

KESTENBAUM: It makes it really hard for the IRS to prosecute criminal cases against tax protesters like Larry, even if their arguments are totally crazy.

ROMER: Larry's attorney keeps going. And remember, this is his attorney talking about him.

KESTENBAUM: He says, and now I will say something that I have been saying for many months. Larry Williams was crazy - not crazy in the sense that he was insane, but crazy in the sense that he believed things that were simply wrong about the meaning of the code, about the application of the tax laws, about how words are defined and what words mean in the Internal Revenue Code.

ROMER: Which counts as legitimate defense. Because of the statute of limitations, Larry was only on trial for three years of not paying taxes. Larry's lawyer went on to point out that while Larry had made a lot of money in those years, he'd also lost a lot.

KESTENBAUM: For one thing, it turned out his secretary had been embezzling money from him.

ROMER: On top of that, Larry lost over $1 million to not one, but two investment scams - and a Ponzi scheme.

KESTENBAUM: By law, Larry was allowed to write all those losses off on his taxes. His lawyer said at the end of the day, he didn't actually have much income during those years to tax at all.

ROMER: In the end, after three days of trial, the prosecutors offered Larry a plea deal, which Larry took. Larry agreed to plead guilty to three misdemeanors and pay a $50,000 fine.

KESTENBAUM: We should point out that that is just for the crime of failing to pay his taxes. Before the trial started, Larry had already agreed to pay the back taxes for all of the years not covered by the trial. And that amounted to $600,000 when he added in fines.

ROMER: Still, after years of flouting the law, Larry Williams left the courtroom that day a free man.

WILLIAMS: Oh, my gosh (laughter). You don't know how good that felt (laughter).

ROMER: Larry says the experience changed how he thought about taxes.

WILLIAMS: I understand that the tax protest argument is wrong. Or, if it's correct, it isn't going to be validated in any court of law, so it doesn't matter. It's a losing battle. So you have to buckle up to the bar and pay your taxes.

KESTENBAUM: Do you feel any guilt?

WILLIAMS: I don't understand the question.

KESTENBAUM: That you should have been paying taxes.

WILLIAMS: I did pay. I paid a lot of money in taxes.

ROMER: It's true. He did - eventually.

KESTENBAUM: The U.S. system for collecting income tax - a lot of it is based on trust. While people think of the IRS watching our every move, the truth is the IRS only has the resources to audit the tiny, tiny fraction of all the returns that they get. The whole system is based on what's sometimes called voluntary compliance, which means it is up to each person to figure out what tax rules apply to them and calculate how much they're supposed to pay.

ROMER: One consequence of that is people like Larry, who will dig through our super complicated tax code and all these old court cases, looking for any argument that will let them legally not pay their income tax.

KESTENBAUM: Especially because if the whole thing ends up in court, you can just say, I didn't know.

ROMER: Eventually, the IRS got so fed up with hearing all of these terrible arguments that they made a list of them and put them up on their website. When I checked this morning, there were 44 of them.

KESTENBAUM: It's actually now illegal to use any one of these arguments in court. They're called frivolous arguments. And if you try to use one, you can get fined $25,000.

ROMER: Frivolous, by the way, is an actual legal term. Someone explained to me that it's a judge's way of saying, basically - you're drunk. Go home and sober up. I'm not talking to you right now.

KESTENBAUM: Larry Williams is finally paying his income tax. He has moved to the U.S. Virgin Islands in part, he says, for tax reasons. You get a lot of tax breaks if you live there - and it's beautiful.

(SOUNDBITE OF SONG, "JUMBLE SALE")

KESTENBAUM: Let us know that you think. You can send us an email - planetmoney@npr.org - or tweet us - @planet money.

ROMER: Our episode today was produced by Jess Jiang and Nick Fountain. Special thanks to Mark Pitcavage, JJ McNabb, David Cay Johnson and Isaac Martin.

KESTENBAUM: Also, NPR is doing a survey about PLANET MONEY and its other podcasts. We would love it if you had time to answer a few questions. You can find it at npr.org/planetmoneysurvey. That's one word - npr.org/planetmoneysurvey.

If you're looking for something else to listen to, check out - are you looking for something else to listen to or not?

ROMER: David, if I...

KESTENBAUM: Are you breaking up with me?

ROMER: David, if i were looking...

KESTENBAUM: Are you looking for another podcast?

ROMER: If I were - if I were for looking another podcast...

KESTENBAUM: Don't look for another podcast. We have a whole back catalog.

ROMER: If I were - if I were.

KESTENBAUM: All right. If you were looking for another podcast, check out Latino USA. It's a good one, actually. Our colleague Robert Smith was on recently talking about the economic mess in Puerto Rico. You can find it at npr.org/podcasts. It's also at the iTunes store and Stitcher and all those other places. I'm David Kestenbaum.

ROMER: And I'm Keith Romer.

KESTENBAUM: Thanks for listening.

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