AUDIE CORNISH, HOST:
The American tax code is very complicated, but the IRS counts on all of us to interpret it for ourselves and mail in a check if we owe something. Every year, thousands of American try to abuse this system to avoid paying their share. Heath Romer from our Planet Money team brings us the story of what happened when one man took this idea as far as he could.
HEATH ROMER, BYLINE: Back in 1986, commodities trader Larry Williams was camping with some friends up in New Mexico's Caballo Mountains.
LARRY WILLIAMS: We started talking, as guys do - talk around a campfire about a lot of things.
ROMER: The conversation eventually turned to the question of the federal income tax and whether there was some way you can get out of paying it. One of the men around the fire was a lawyer, a man named Jim Knowles.
WILLIAMS: Jim said, oh, you know, this is all BS. You know, you've got to pay your taxes. I said, well, you're a lawyer; look into it.
ROMER: So Jim did. He sifted through old court cases and found what he thought were some pretty strong legal arguments for Larry not having to pay his taxes, and Larry hated paying his taxes.
WILLIAMS: When somebody comes and takes 50 percent of my income and doesn't even have the courtesy to point a gun at me to do it, it's bothersome.
ROMER: Larry's extreme aversion to paying his taxes led him to take some extreme actions. He filed papers declaring himself a sovereign citizen of the state of California. According to his lawyer, Jim, by opting out of U.S. citizenship, Larry could opt of the federal income tax. And if that wasn't enough to satisfy the IRS, Larry formed something called a pure trust. He routed pretty much all of his income into the trust. Now, went the idea, it wasn't his personal income anymore. It was the trust's income.
WILLIAMS: We went down to Bank of America, opened up the bank accounts for the trust. You know, we had tax identification numbers and all that stuff.
ROMER: And then, Larry stopped paying his federal income tax, and you know what happened?
WILLIAMS: Nothing happened.
ROMER: For years. Larry says he wasn't even particularly nervous about what he was doing.
WILLIAMS: Why would I be nervous? I had advice of two CPAs and a couple of lawyers.
ROMER: I thought it might not be a terrible idea to talk to a third lawyer, so I called Dan Evans, an attorney who has spent a lot of time studying the kinds of arguments tax protesters like Larry make. First, I asked Dan about Larry's pure trust idea.
DAN 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.
ROMER: So then I asked him about the whole sovereign citizen of California angle.
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.
ROMER: It turns out that's pretty much the federal government's view as well. Our tax protester, Larry, and the IRS traded letters for a few years. But eventually, Larry was arrested and hauled into court. Before the trial, Larry agreed to pay the $600,000 in taxes and interest he owed from all those years of not paying, but there was still the question of criminal charges.
WILLIAMS: I was charged with income tax evasion fraud, multiple bank accounts, all sorts of really bad.
ROMER: To which Larry's attorney replied, Larry didn't know any better, which is generally not a great legal argument, but in tax cases it can work. Because the tax code is so complicated, ignorance of the law is a legitimate defense. Also, for the years in question, Larry had lost a lot of money to investment scams. Because of all those losses, he didn't have much income to tax. In the end, Larry plead guilty to three misdemeanors and paid a $50,000 fine.
WILLIAMS: I understand that the tax protest argument is wrong. You got to buckle up to the bar and pay your taxes.
ROMER: For the IRS, it might actually have cost more to bring Larry back in line than he ever owed them, but that doesn't mean it wasn't worth it. Let too many people like Larry Williams interpret the rules however they want to, and the whole tax system could stop working altogether. Keith Romer, NPR News. Transcript provided by NPR, Copyright NPR.