Well that’s exactly the news American citizens are coming to terms with and, as Ian Wishart reports, New Zealand and Australia may be next in a constitutional legal fight that threatens to bring the Republican debate in NZ two decades closer.

"That’s great!" the woman quipped, "because if you follow my beliefs you won’t have to pay taxes either."

It could be apocryphal, but Lynne Meredith swears it’s true as she sips on a tropical cocktail beside an azure hotel swimming pool on a dazzling Fiji afternoon. Whether she managed to convert Jehovah’s helpers isn’t clear, but her impact on the US tax system cannot be ignored. A veteran tax activist and litigator, Meredith claims to have helped tens of thousands of Americans "opt out" of the US tax system. Legally. These are people who no longer pay taxes – ever – and who hold letters from the US Internal Revenue Service confirming their employers are to deduct nothing from their wages ever again.

"I turned the tables and sent the IRS very aggressive letters and threatened to sue them for fraud and extortion under the colour of law," John Hoffman wrote to Meredith. "Eight weeks later I received a refund cheque for 100% of the funds they were illegally withholding.

"Based upon my success for 1992, I submitted a request for a refund of all previously paid taxes for 1993, 1994, 1995 and 1996. Sure enough, back came FULL refunds plus interest!"

And Hoffman’s letter is just one of many.

How can it be that citizens of the most powerful country on earth can simply tell the feared IRS: "I no longer wish to pay taxes. Leave me alone."?

To New Zealanders who’ve recently witnessed the damning inquiry into a local IRD that has forced parents and their children to commit suicide over tax problems, the concept of citizens telling their government to "get lost" seems foreign.

"I equate the IRS to the Wizard of Oz," she says. "He’s out there making these loud and scary noises and frightening everyone, and they find he’s this peeny little guy behind this wall."

If the sartorial, bearded elegance of law partners from New Zealand megafirm Russell McVeagh is what you expect from a tax warrior, then the brash and brassy Lynne Meredith is clearly a surprise. Nonetheless, she has arguably saved Americans more in taxes, legally, than New Zealand lawfirms have ever saved any of their clients by any means.

Even more significantly, Meredith is muscling in on New Zealand’s tax advisory work, claiming more than two thousand New Zealanders have joined her client list, and some haven’t paid tax now since 1993.

Her journey began, naturally enough, with a tax problem.

"I have been an entrepreneur for over 22 years," she writes at the end of her first book, Vultures in Eagle’s Clothing. "My quest for knowledge about the IRS began out of fear. I was a single mother of three children and when April 15^th came every year, regardless of what the IRS said I owed them there was nothing left in the bank account.

"I found it strange that although my business was allowed to deduct for the expenses of its existence, I as an individual could not. There was no deduction for the rent, the food, the electricity, the phone bill, the child care, the Pampers.

"The bottom line was, on April 15^th, faced with the decision of feeding my kids or paying the income tax, I chose to provide for the needs of my family."

In short, Meredith stopped filing tax returns, and stopped paying withholding tax. It should have been a one way ticket to prosecution. Instead, it was a learning curve.

CITIZENS’ RIGHTS

The first step to understanding the very serious legal issues that allow Americans (and possibly New Zealanders) to lawfully refuse to pay income tax, comes in the first instance from a study of the US Constitution.

New Zealand, of course, doesn’t have a written constitution and New Zealand and Australian citizens are still "subjects" of the Crown. The legal implications of that will shortly become clear.

Anxious to discover what her own legal position would be when the Revenue finally came calling, Lynne Meredith consulted legal advisors and the statute books. What they came up with in the US Constitution – the founding document of the American states – was a discovery that the "United States of America" is not the same as the "united States of America" referred to in the Declaration of Independence and the Constitution.

Following the War of Independence, England’s King George III ceded full sovereignty to the American people, in the first instance. It was the American people, exercising their sovereignty, who then adopted the Constitution laying down the rules by which any future Government must work.

"We have a unique political system there where the people are the sovereign, and the government is the servant, and because the Constitution is the supreme law of the land, any law contrary to it is null and void," Meredith explains.

To ensure that the federal government remained a servant of the people, US lawmakers granted the official, United States Government (note the capital ‘U’), only limited powers. The US Government would have exclusive sovereignty only over territories that were not states of the Union in their own right. This includes, for example, Guam, Puerto Rico, American Samoa and Washington DC, but the federal government has no jurisdictional power over the individual states like California or Nebraska.

An interesting illustration of this in action is that New Zealand has bilateral treaties directly with some individual US states like California, rather than with the US Government as a whole. Under New Zealand’s family law codes, California is treated as a sovereign country on an equal footing with Australia. Facts like these, however, are not known to most New Zealanders or even Americans.

What the original states of the Union anticipated was that they would be the masters of the federal government: the latter would do their bidding in foreign policy and securing new territories and lands for settlers.

In regard to legislative control over the states, the federal government was empowered to create legislation, but only if it complied with the US Constitution.

And that’s where it becomes tricky.

In order to preserve the people’s newly-won freedoms, the Constitution guaranteed citizens certain inalienable rights, including the right to enjoy the "fruits of one’s labour" unhindered by Government interference. The battle for independence had, after all, been fought over the issue of tax.

Accordingly, any future Government could only tax citizens "by apportionment", which meant every person paid the same amount regardless of income.

Apportionment of the income tax burden was what the drafters of the Constitution saw as the only fair method of distribution, and is the opposite of graduated income tax.

"Apportionment means that if my tax liability is $500 a year," says Meredith, "you each pay $500 a year as well because the idea is that each person is entitled to receive the same services from the government, so why should one person pay more?"

Rather than try to implement apportioned taxes, virtually all US revenue collection up until the middle of this century came from "privilege" taxes on alcohol and tobacco.

Another such taxable "privilege" was doing business through a corporate entity like a limited liability company. Such companies owed their existence to Government legislation, and so could be taxed. The only other form of taxation allowed for in the Constitution was for the purpose of "raising armies", and even then the tax was limited to a maximum period of two years.

But the power to impose income tax was extremely limited, and the Supreme Court has previously ruled that income tax is totally voluntary.

In McCulloch v the State of Maryland, the court held "all subjects over which the sovereign power of the state extends [ie, corporations or other statutory entities] are objects of taxation but those over which it does not extend are, upon the soundest principle, exempt from taxation.

"This proposition may almost be pronounced as self-evident. The sovereignty of a state extends to everything which exists by its own authority or exists by its permission."

As natural-born humans do not exist because of the authority or permission of the state, they are not subject to income taxation.

Within those territories it controls, however, the federal US Government has complete power to impose whatever laws or taxes it chooses: the US Supreme Court has ruled that people living in those territories do not have the constitutional protections enjoyed by citizens of the other 50 states.

"The laws of Congress in respect to those matters do not extend into the territorial limits of the states, but have force only in the District of Columbia, and other places that are within the exclusive jurisdiction of the national government," ruled the US Supreme Court in Caha v US.

Ballentine’s Law Dictionary sums up the settled law on the issue, defining "territory" as: "A geographical region over which a nation exercises sovereignty, but whose inhabitants do not enjoy political, social or legal parity with the inhabitants of other regions which are constitutional components of the nation. With respect to the United States, for example, Guam or the Virgin Islands as opposed to New York, California or Texas."

It may seem like word games, but Americans are cutting themselves free of the US tax system precisely because of what attorneys are describing as "word art". It all comes down to the legal definition of particular words used in statutes, as opposed to their popular public usage. While the Internal Revenue Code applies to all "United States citizens", the question arises: who is a US citizen?

Most people, especially the public and the news media, had not bothered themselves with legal niceties like that, and simply considered themselves as US citizens by virtue of living in a US state. That’s why they’ve paid their taxes compliantly for the past five decades.

But in the legal stratosphere of the US Supreme Court, very technical battles had earlier been fought on these very definitions. What was the United States?, for example.

In 1901, during the Downes v Bidwell court case, Justice Harlan warned of the dangers of not giving constitutional protection to residents of the territories.

"The idea prevails with some…that we have in this country substantially two national governments; one to be maintained under the Constitution, with all of its restrictions; the other to be maintained by Congress outside and independently of that instrument, by exercising such powers as other nations of the earth are accustomed to.

"I take leave to say that, if the principles thus announced should ever receive the sanction of a majority of this court, a radical and mischievous change in our system of government will result. We will, in that event, pass from the era of constitutional liberty guarded and protected by a written constitution into an era of legislative absolutism.

"It will be an evil day for American liberty if the theory of a Government outside the supreme law of the land finds lodgement in our constitutional jurisprudence. No higher duty rests on this court than to exert its full authority to prevent all violation of the principles of the Constitution."

In 1945, the Supreme Court issued what it said would be its last ever definition of the term "United States", in the court case Hooven and Allison Co v Evatt. Their analysis, summarised by writer George Bancroft, was "Our Union in its foreign relations presents itself with all its states and territories as one and indivisible, a garment without a seam; But at home we are separate sovereign states of the union. Within the limits of the states the government of the United States has no powers but those that have been delegated to it."

Why is this relevant to income tax? Because the IRS is a federal agency, and federal agencies have limited jurisdiction over the states of America.

US Government law enforcement officers, for example, can take criminal proceedings against citizens of the 50 states in only five areas: espionage, sabotage, interference with the mails, destruction of federal property or frauds on the federal government.

Income tax in the US was applied only briefly in the 150 years leading up to World War II, usually as a result of being struck down each time by the Supreme Court. In order to get around the problem, the US Congress passed the 16^th Amendment to the Constitution to allow for graduated income tax, but the move failed. The Amendment ruled:

"The congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states."

However, the amendment did not contain any clause repealing the original Constitution clauses limiting the federal government’s tax powers. In addition, US courts had already defined the word ‘income" as meaning profits and gains, separated from capital. In numerous cases, they ruled that a worker’s labour for money was his capital, and the taxable gain would come if he then took that money and invested it for a profit.

Significantly, the US Supreme Court has said of the 16^th in Peck v Lowe:

"The 16^th Amendment does not extend the power of taxation to new or excepted subjects."

And in Stanton v Baltic Mining Co:

"The 16^th Amendment conferred no new power of taxation but simply prohibited the income tax from being taken out of the category of indirect taxation to which it inherently belonged."

Of course, the US Government did have the power to levy an income tax to pay for military action, provided such compulsory tax only lasted for two years. They introduced a nationwide income tax in 1942 to pay for the war effort, promoted in cinemas around the country in a Donald Duck cartoon featuring the Disney character paying income tax for the good of the nation. Although the tax was quietly repealed when its two years were up on May 29, 1944, nobody bothered to tell the public. After all, the war was still on and the D-Day invasion hadn’t even begun. Uncle Sam needed dollars, and people in the habit of paying tax kept on paying and have done ever since. Only those who invoked their constitutional rights have managed to legally avoid it.

The power of the US Constitution over the IRS can be found in the IRS Handbook For Special Agents, which informs tax inspectors trying to seize a taxpayers books and records that the taxpayer "may decline to submit them for inspection on constitutional grounds". The legal basis for any American refusing to hand over documents to the IRS is the Fifth Amendment right not to self-incriminate.

As the US Supreme Court noted in the 1969 case US v Dickerson, "Only the rare taxpayer would be likely to know that he could refuse to produce his records to IRS agents…who would believe the ironic truth, that the cooperative taxpayer fares much worse than the individual who relies upon his constitutional rights?"

In New Zealand and Australia, there is no constitutional right against self incrimination, only a common law one, and it appears to cover only personal testimony, not documentation. In fact, New Zealand’s Serious Fraud Office Act goes a step further: it gives the SFO the power to compel witnesses to self-incriminate and produce documents for inspection.

At a constitutional level, however, Lynne Meredith’s assault on the IRS was heating up. The Internal Revenue Code, and its implementing legislation, states in section 26 that income tax is imposed "on the income of every individual who is a citizen or resident of the United States."

That may sound like a simple, all encompassing definition, but it is not.

Meredith argued, successfully as it turned out, that the Supreme Court’s legal definition of the United States meant "citizen or resident" could only apply to someone who lived in Washington DC or one of the territories that the federal government had jurisdiction over. The court’s definition of citizen was "every person born or naturalised in the United States and subject to its [the US Government’s] jurisdiction."

Remember, the term "United States" has already previously been defined by the Supreme Court to refer to the federal government and its territories.

Federal government employees are also liable for income tax, because their employment as "public servants" is considered to be a taxable "privilege" under the Constitution.

But if income tax is mandatory only for people who are US Government "citizens" or employees, where do people living in the 50 states fit in? The US Internal Revenue Code describes them as "non-resident aliens" because they live in sovereign states outside of federal jurisdiction. The "aliens" are not liable for tax, says the IRS Code, unless they are doing business with the US Government or with an entity situated inside the territorial limits of US Government jurisdiction.

As further corroboration of the US tax duality, even New Zealand’s Income Tax Act 1994 notes the special position of the "United States of America, excluding its possessions and territories" – a subtle distinction few casual observers would have understood.

THE TRAP IS SET

It is easy to see how millions of American taxpayers became confused and voluntarily paid taxes they were not liable for. Faced with a law saying US citizens must pay tax, how many would deny being US citizens? How many would have the expert legal knowledge required to know the difference? And how many would describe themselves on an official government form as "a non-resident alien", and then face fearful nights worrying if Immigration officials would try to arrest them?

The US Supreme Court noted the problem in US v Minker: "Because of what appears to be a lawful command on the surface, many citizens, because of respect for the law, are cunningly coerced into waiving their rights due to ignorance."

It is what is known in legal terms as acting "in colour of law", which means an act or request that appears to be lawful because of the status of the person making it, but which is not. A legal game of "Simon Says", if you like, where the public are the losers.

But why didn’t the US Government come clean and educate the public? Because it needed their tax money. It needed people to believe they were obligated to pay income tax.

How did the US Government get away with it? Because US courts have ruled "All persons are presumed to know the law. If any person acts under any unconstitutional statute, he does so at his own peril. He must take the consequences."

"The presumption," says Meredith, "is that a government agent always acts within the law.

"The United States Government legally creates legislation, which may be unconstitutional for the 50 states, under the authority and guise of legislating for the citizens and residents of the territories and possessions ‘belonging to’ the United States, over which the United States has exclusive authority.

"Such federal legislation is made applicable only to the citizens born and residing in territories, possessions, instrumentalities and enclaves under the exclusive jurisdiction of the United States.

"These ‘individuals’ are called ‘US citizens’ or ‘citizens of the United States, subject to its jurisdiction’ in such legislation. The average American, of course, believes he or she is such a citizen (because it was never disclosed to them that our Congress legislates for two different types of citizens).

"Because that American has respect for the law, he or she voluntarily consents to obey this legislation that is contrary to the Constitution."

Although people did not realise it, the tax codes were based on contract law. By inadvertently volunteering to join the tax system by applying for a number or accepting a deduction from their wages, Americans were legally deemed to have accepted the contract with the Government, complete with its penalty provisions if the terms of the contract – tax payment – were not met.

But if you thought that kind of government subterfuge was big enough on its own, Meredith and her researchers discovered even more when they examined the federal court system. Remember that the public are presumed to know the law, and that a person who voluntarily consents to something unconstitutional must wear the consequences. So what extra trick does the federal government have up its sleeve?

Meredith found out when she noticed the federal courts always have a US flag in the room, fringed with yellow braid around the edges. What could possibly be significant in that? In short: everything.

The US Government’s 34 Opin Atty Gen, which lists legal opinions from the Attorney General’s office, notes that "there is no statutory authority for the ‘yellow fringe’ around the flag. The use of such a fringe is prescribed in current Army Regulations No. 260-10. The yellow-fringed flag is, therefore, a military flag."

Curious, Meredith dug deeper – only to discover the federal court system is based in military law, under the aegis of US Code Title 18 s7: Admiralty Jurisdiction is applicable to the following areas:

"The High Seas; Any American ship; Any lands reserved or acquired for the use of the United States, and under the exclusive or concurrent jurisdiction thereof."

"It is an elementary rule of pleading," US courts have already ruled, "that a plea to the jurisdiction is…a tacit admission that the court has a right to judge in the case, and is a waiver to all exceptions to the jurisdiction."

In other words, if as a Californian resident you get taken to a federal court over an IRS tax bill, you are giving the court carte blanche to treat you as a ‘US citizen’ unless you challenge the court’s jurisdiction to hear the case.

"If you’ve ever left a federal court feeling that you have been to a Court-Martial rather than a court of law, this is the reason," says Meredith. "Don’t be deceived by the pretty yellow fringe, it is your warning that you have submitted yourself to the ‘rule of the master’ and are under the jurisdiction of that flag. If you enter a court room and enter a plea in the presence of a military flag, you have acquiesced (consented without protest) to federal military jurisdiction. It is your warning that you are leaving the majority of your fundamental rights, as protected by the Constitution, at the door."

A similar situation exists in Canada, where tax researchers have also discovered Admiralty Law is at the heart of Canadian federal courts, primarily because of its status as a former colonial outpost of Britain.

The majority of Lynne Meredith’s client victories over the IRS have come in direct correspondence with the agency itself. A simple letter from the taxpayer, telling the IRS they are not a US citizen as defined by the Supreme Court, do not do business with the US Government and are not a federal employee, is usually sufficient to have all taxes refunded – even for previous years – which can result in six figure returns to ordinary Americans.

The challenges to IRS income tax have become so widespread that the IRS now provides a standard letter to all its branches [see box] informing people they are no longer required to file tax returns or pay tax.

You’d think someone who’s personally sold 150,000 Americans on the concept of no longer paying income tax would be on an IRS "most wanted" list, but she’s only ever had one run-in with the US Internal Revenue Service, the result – she says – of a big mouth.

"For the first six years after I wrote the book, I hadn’t heard anything from the IRS. And I made this statement at a seminar that I had never heard from them – not so much as a postcard – and then a week later 40 agents showed up at my door, illegally seized my books and my records and broke into my safe and took my gold and my silver and everything that I’d accumulated.

"However, within two days I challenged their position and I had all my property back again. That was a year and a half ago and I haven’t heard a word from them again."

Not content to let sleeping vultures roost, Meredith has filed a $110 million dollar lawsuit against the IRS for wrongful search and seizure. As for the IRS, it has conceded on record that more than 35 million Americans are no longer paying income tax.