On Frivolous Dodges And Filing Lawsuits
I HAD A CONVERSATION THE OTHER DAY WITH SOME GOOD FOLKS whose very large refund claim for 2012 has been being dodged for years by the United States, which has been issuing a combination of "We need more time to respond to your issue 45-day delay" letters from one IRS office and "frivolous-assertion" countermeasures from another. One thing that came up was the matter of filing a suit to compel the return of withheld amounts, an option that becomes increasingly timely as a pattern of evasion settles into an apparent permanence.
I have spoken of Uncle Sammy's "frivolous"-flurry evasion strategy at seminars and on radio shows over the years, and the statutes of limitations regarding the filing of a suit is briefly discussed on the FAQ pages here at losthorizons.com. However, it is my sad and frustrating experience that the FAQ pages are neglected more than they are used; and further, a few folks who have been subjected to long-term evasions may be approaching lawsuit-filing deadlines. Thus, a few words on the subject of those dealines here, and on the construction of such lawsuits, as well.
FOR A NUMBER OF YEARS NOW AN UNFORTUNATE FEW EDUCATED FILERS have been subjected to an ever-more transparently bogus game of "frivolous-assertion" Whack-a-Mole by the IRS, instead of the simple honoring of their claims. Sometimes selection for this obnoxious treatment seems random and sometimes, perhaps, the amount at stake plays a role.
These games of agency resistance increasingly lack even a superficial appearance of legitimacy. In addition to all the issues discussed in the drill-down on the subject here (and particularly the outright "Position 44/AR" hoax discussed here), some folks have seen such ludicrously invalid scare-tactics as multiple "frivolous penalty assertions" declared in regard to a single filing, or "assertions" in response to simple letters to the agency, or even-- got to love the irony of this flail-- "assertions" in response to a claimant's response to a previous "frivolous assertion".
One thing all "frivolous" nonsense has in common is that if it occurs in lieu of a claimed refund, it can serve to distract the claimant from the option of filing suit to compel the refund (which would be in federal District Court or the Court of Claims)-- an option which is subject to some varying limitations.
Under the provisions of 26 USC §7422, suits to compel refund brought pursuant to tax law provisions can only be filed after a claim has been made (which is done by way of a 1040). 26 USC §6532 imposes two limitations on such suits: no suit can be brought before the earlier of either six months after the making of the claim or the receipt of a formal disallowance notice from the IRS; and if a notice of disallowance is issued, there is only a two-year window in which to launch the suit.
For pretty-much all educated filers whose claims are not simply honored, the two-year limit is technically not an issue (although a six-year limit might apply-- courts have flipped between that and no limit). Actual disallowances of educated claims are as rare as hen's teeth (a fact which further underscores the legal invalidity and utterly fictitious nature of all the "frivolous" nonsense).
However, simply to preclude the hazard of a false assertion that a notice was sent by the same agency that has proven its unscrupulousness in countless other ways (especially in light of the fact that federal courts have held that there's no need for the service to prove that you ever received the thing in order to assert the two-year cut-off), or in prudent concern that some gratuitous doctrinal change in what qualifies as a "disallowance" for purposes of this rule might be made at some point in the future in an effort to freeze out educated filers from suing, treating the two-year rule as generally applicable is a good idea, in my mind. Besides, two years is plenty of time to allow for the fulfillment of a simple and very straightforward statutory mandate (even one for which no particular fulfillment time is specified).
Consequently, the first thing to be understood by anyone to whose circumstances any of this is relevant is that the "frivolous nonsense" is a distraction from action while the clock ticks. This doesn't mean that "frivolous" threats and other notices can prudently be ignored and go without response (for fear of a spurious allegation of acquiescence by silence), but they mustn't be allowed to keep one from preparing and filing suit when a reasonable amount of time has passed (say, a year or so, at most, or what you would allow to any other debtor, especially one who is obviously trying to bullsh*t you and/or pretending he doesn't really owe you the money).
THE SECOND THING TO BE UNDERSTOOD BY ANYONE IN THESE CIRCUMSTANCES is that a suit for the return of withheld property can cite two separate grounds-- those provided-for by tax law provisions and also simple equity. For either or both combined the complaint in most cases should be very simple and straightforward, taking little more than a page to lay out.
All that will typically be involved is such a complaint is a recitation that the tax law requirement of a properly-completed return resulting in a sworn claim for the return of one's property has been met (and/or that the property involved belongs to you); no properly-completed sworn return declaring contrary numbers, calculating an alleged tax liability, and therefore resulting in a competing government claim to the property has been made-- as is required by law before the government can assess a tax (or assert ownership of the property for any other reason); therefore no material facts are in dispute and as a matter of law (or of equity), the refund must be issued.
Does it sound like I am oversimplifying? Well, think about how your perception of the tax went from hugely complicated to simple and straightforward when you first had your light-bulb moment while reading CtC. While it can be safely expected that the United States will do everything it can think of to divert you (and the judge) off center and into debates about this and that, the real issues are as simple as I say and your task is simply to stay focused. Everything else will fall into place when you succeed at that act of self-discipline.
There are two primary efforts to divert that can be expected. One addresses only the "tax law structure" claim, and is the argument that somehow a return doesn't meet the requirements at Treas. Reg. § 301.6402-2(b)(1). This requirement provides that, "the claim for refund must include each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof."
It is hoped that you will imagine yourself obliged to defend and explain the entries on your return, or that you will believe (and therefore not dispute) that your claim (the 1040 package) didn't meet this standard. But all it really means is just that a 1040 package needs to have stated the claim amount, and the facts by which it was arrived at-- both of which are already accomplished by any educated return.
In most cases those facts and grounds sufficient to validate the claim will consist of nothing more than: $X was withheld, while only $Y was received as gains by which taxable activity is measured (the amount of "wages" or other "income" received); applying the rate of tax to Y results in a calculated refund amount of X-- in other words, exactly what appears on a Form 4852 and Form 1040. Other filing circumstances will vary slightly from this model, but all will be met by nothing more than the educated return package itself.
THE OTHER, MORE SBTLEe (but also much more spurious) effort to derail a suit that might be expected is an argument that the court should step outside the real issues and assume the authority to make judgments about what is said on the plaintiff's return on the allegation that the refund claim is "not sincere", 'cause who could really believe that everything that comes in is not taxable by the government under the income tax? I kid you not.
Of course, this argument would only be relevant to a tax-law-structure-based suit, and irrelevant to the equity claim; further, the broadly-stated answer is simple:
"Whatever may or may not be true about the sincerity of my claim is unknowable by the court. It is also not properly within the court's purview in any event, in light of my uncontested, sworn signature attesting to my sincerity.
Further, and in any event, the government's failure to make a claim to my property in the manner required by law is straightforward and fully dispositive of the issue at hand. However much the government may invite the court to pretend to powers of mind-reading, it does so in an effort to divert the court's attention into irrelevancies. Here is what is relevant: I have made at least a facial claim under provisions of tax law by way of my sworn return, whatever else may be alleged about it, and an equity claim by way of this suit as well, and the government, which by law can only dispute either through the same mechanism, has not even done that much. Therefore on either basis my property, ownership of which has never been relinquished in any event, must be returned to my possession."
I hope to see some quick work getting these suits in progress by those in the affected circumstances.
P. S. Union states have their own statutes of limitation for the bringing of suits to compel refunds (which would be brought in state courts). Some are very brief-- as little as 18 months after the six months from the making of the claim or the issuance of a disallowance. If a claim is being evaded by a state tax agency, the frustrated claimant is advised to promptly check the appropriate state laws to ascertain the available window of opportunity.
P.P.S. See the note on 'Affidavit in Support' below.
Why Aren't People Suing?
SO, I WONDER HOW MANY FOLKS have thought about the fact that the First Amendment prohibits even a bogus "frivolous return penalty" threat, such as the customized "3176C" notices that a few educated filers have received over the years (see here, here and here for some examples)? After all, a "frivolous penalty" threat amounts to a threat by the government to punish someone for saying what the government wishes they would not say (or for not saying what the government wishes they would say).
Even when the threat is entirely reliant on the timidity and cooperation of the target for its effect or an outright hoax, the object of the exercise is to control the target's speech. Thus even when technically toothless it remains a gross violation of the Constitution and the victim's rights.
The threat is also intended to influence the target into at least withdrawing a claim to the refund of withheld or paid-in property, which would then default to government ownership (and really, the threat is meant to coerce an active endorsement of a government claim to the property, giving the appearance that the government's taking control of that property is proper and beyond legal challenge). Thus, these "frivolous penalty" threats are doubly criminal.
AFTER ALL, PROHIBITING INHERENTLY CORRUPT exercises of state power of precisely this sort is the reason we have a "freedom of speech" element in the First Amendment. Americans can't be made to say things for the government's benefit, nor punished for saying things the government finds inconvenient or at its expense-- this is perhaps the most thoroughly-settled aspect of Constitutional law there is. See a nice summary of Supreme Court case-law on this point in sections A., B. and C. of this paper.
Plainly, there is no exception to the amendment's provision whereby the government can simply argue, "We can punish you until you say what we want you to say, either directly or by being silent in the face of the allegations of others, as long as we call your expressions "frivolous", or exercise the coercion in the context of taxation..."
I think people subjected to this rights violation should be furious and in a suing mood, don't you?
(BTW, as an interesting side note, consider the limiting factor built in to the legitimate application of the 'frivolous return penalty" provisions, confining their application to those who are speaking not for themselves, and not as sovereign individuals in their own capacity, but on behalf of someone else, and as a legal duty, not an elective act:
26 USC § 6671 - Rule for application of assessable penalties
(b) Person defined The term “person”, as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
The relevant speech of those within this specialized sub-class of "person" can perhaps be deemed outside the First Amendment's ambit. By this mechanism the "frivolous return penalty" is harmonized with the Constitution.
By the same token, the First Amendment prohibition of government speech-violations against undistinguished persons means that the sub-class defined at 26 USSC § 6671 must necessarily be confined to those described in that definition, per CtC scholarship. If that sub-class were not so confined, but deemed to extend to any kind of persons other than those circumscribed by a "limited-expansion-only" construction of the definition, the "frivolous penalty" would be unconstitutional.)
"Like a muddied stream or a polluted fountain is the righteous man who gives way before the wicked."
P.S. Some state governments have statutes very explicitly criminalizing efforts to coerce people, such as those discussed above. See this page for more information.
P.P.S. See the note on 'Affidavit in Support' below.
Have you been harassed by frivolous threats? Don't stand for it; it's time for a class-action lawsuit.
It All Starts With A Return
MANY YEARS AGO, SOME TAX ATTORNEY OR IRS OFFICIAL made the unremarkable observation in a trial brief or in testimony that, "It [collection of the tax] all starts with the filing of a return." The reference was to the filing of an "information return," [IR] such as a W-2, 1099 or K-1.*
It IS an unremarkable observation. It is obvious that for the government to assert an excise-tax liability to itself on someone's part, someone with purported personal knowledge must say that taxable events occurred, and this is what all IRs say. Any amount reported on such a form as having been paid is being said to have been paid in connection with the recipient's conduct of a taxable activity.
But as unremarkable as it might be to observe the significance within the liability-allegation-structure of IRs, I imagine that very few folks have seriously considered IRs from a pre-emptive perspective. That is, I imagine that few have thought about the fact that it is ONLY because erroneous IRs have been issued about them that it is necessary to go to the trouble of rebuttal in order to secure refunds of improperly-withheld amounts, with a serious eye toward preventing these inconveniences.
The fact is, no one should have to rebut anything, because no one should be falsely testifying about anyone else (or testifying in ignorance, which is morally no different than false testimony). And yet, such false testimony is a common-place-- so much so that beginning next month literally tens of millions of erroneous IRs will flood the mail and cyber-space like a liberty- and rule-of-law-destroying plague.
NOW, IT COULD BE FAIRLY SAID that much of the erroneous IR plague is launched out of the sheer ignorance of those responsible. Most of these folks have never spent five minutes seeking any personal knowledge of the tax or the meaning and effect of forms they sign.
But at the same time I think the ignorance of IR producers is so casually maintained simply because the responsible parties never face any downside from getting things wrong. Having never come to harm for doing so-- even when their attestations have been wrong, as in every single one of these cases, and the hundreds of thousands of others of which these are a sampling, in which the IRS or state tax agencies themselves have agreed that the rebutted IRs were erroneous and issued refund checks accordingly-- the producers of IRs follow the path of least resistance and choose to declare every payment made to anyone to be from taxable activity.
I think that this should change. And, in fact, Congress thinks it should, too:
Sec. 7434. - Civil damages for fraudulent filing of information returns
(a) In general
If any person willfully files a fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.
In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the greater of $5,000 or the sum of -
(1) any actual damages sustained by the plaintiff as a proximate result of the filing of the fraudulent information return (including any costs attributable to resolving deficiencies asserted as a result of such filing),
(2) the costs of the action, and
(3) in the court's discretion, reasonable attorneys' fees.
Plainly, Congress intends for those who are victims of erroneous IRs to impose some discipline through civil suits, with the consequence of encouraging all who might imagine themselves obliged to produce these forms to get educated as to the specialized circumstances in which they actually are appropriate.
"When you can't make them see the light, make them feel the heat."
NOW, IT WILL BE NOTED that this statute provides for a civil action in regard to fraudulent IRs, rather than just erroneous ones, explaining the distinction by the deployment of "willfulness" as an element of the offense. Any erroneous IR that is filed in the knowledge that it is wrong is a fraudulent document-- a part of a scheme effectively intended to defraud the victim of what the government will attempt to take from him or her in taxes not actually owed.
Certainly, what is found in the law about IRs and the nature of taxable activities is technically enough to make any erroneous IR-filer liable to the penalty (ignorance of the law being no excuse in our system). And suit could be filed on common-law grounds without regard to "willfulness", there having been demonstrable harm caused.
But in order for the statutorily-provided incentive to accuracy at 26 USC § 7434 (and the remedy it offers to any victim) to be readily and easily available for use, the IR-filer must have been put on notice. Making that notice in preparation for a suit should the law be disregarded and an erroneous (and now willful, and thus, fraudulent) IR be filed about someone is what I mean here by being "pre-emptive".
I suggest that anyone wanting to make use of this disciplinary and wrong-righting tool act now by providing anticipated IR-filers with a printed copy of this document, accompanied by print-outs of this, this, this, this, this, this, this and this. A close re-read of 'Lies, Damned Lies And W-2s', 'W-9s And Other Alien Notions' and 'W-4s, The Blind Leading The Blind Down A Primrose Path' in CtC, and what is found here and here, and attending to any tasks that might suggest themselves thereby, is strongly recommended.
The printouts should be accompanied by a cover letter explaining that they are being furnished in order to ensure that the furnisher suffers no harm due to erroneous declarations by way of W-2, 1099s or other "information returns" that taxable activities were involved in any payments he/she has received, and to protect his/her legal remedies under 26 USC § 7434 and the common law.
All this having been taken care of prior to the issuance of any IRs, it is my lay opinion that everything needed to unequivocally establish "willfulness" will be in place should false allegations end up being made. The progress of a suit then brought under 26 USC § 7434 should be swift and sure.
I hope those undertaking leadership roles in their state groups will step up and help interested members through the procedures outlined above, and that everyone however situated will encourage and help each other as needed.
"I am a great believer in luck, and I find the harder I work, the more I have of it."
*Sadly, some folks in the "tax honesty" community who are ignorant of the structure and mechanics of the tax-- and even that certain forms are known as "information returns"-- have misunderstood this statement. They have imagined it to be a reference to the filing of a 1040 and have therefore imagined that the mere filing of such a form somehow makes the filer liable for a tax on any and all receipts. This has led many to embrace the seriously harmful, completely counter-productive practice of "non-filing." See this document for some discussion of the error and its ill consequences.
NOTE: Though omitted from the discussion above for the sake of staying on message and out of respect for the KISS principle, accuracy requires acknowledgement that while the filing of information returns is far and away the most common-- indeed, nearly exclusive-- first event involved in any given collection of the income tax, the unilateral filing of a 1040 on which more than the exemption amount of "income" is declared would start the collections process all on its own, even in the absence of a prior or corresponding IR.
Click here for some additional material on the subject of erroneous information returns.
ON FEBRUARY 3, 2016, SHAMELESS THUGS in the DOJ and a federal court used the specious assertion that a claim was "insincere" as an excuse for dismissing a refund lawsuit by two educated Americans. The evasion took this form: "Because plaintiffs' amended return did not evince an honest attempt to satisfy the law, it did not constitute a valid claim and plaintiffs have not satisfied the statutory prerequisites for filing suit. Thus, plaintiffs' complaint fails to state a claim upon which relief can be granted."
The subtext reads: "Let's take the position that these folks couldn't possibly really believe that their earnings aren't federally-taxable." Thrown-in as a launch point is the utter irrelevancy that the plaintiffs' pre-educated original return had declared their earnings to be "income", which amounts to, "Once you've said you believe in Santa Claus, you can never credibly say you don't believe in Santa Claus". By itself the deployment of such patent nonsense makes clear that everything that follows is evasive baloney.
At the same time, and underscoring what's really going on here, the court doesn't assert or conclude that the claim being evaded is objectively wrong. That is, there is no assertion or holding that any "income" was earned by the claimant seeking the return of withheld amounts, or that any tax is or ever was owed.
This disgraceful dodge is a last-ditch, desperate effort by defenders of the "ignorance tax" gravy-train which has been exploited by the connected class for the last 75 years. Happily, a simple measure should render it untenable.
THE ESSENCE OF THE GOVERNMENT'S DODGE HERE is the 'Beard' test for the validity of a tax return, one of the four elements of which is the requirement that a return evince an honest effort to comply with the tax laws. Normally (and properly) that test is satisfied by nothing more than a signed and unaltered jurat (signing attestation) on the return. "An affidavit is to be believed" is a maxim of law, and it applies here just as in any other instance of sworn statement.
But lacking any other grounds for denying a refund claim, this court has played along with a DOJ tax-division proposition that in the absence in the record of countervailing bases for a filer's inconvenient beliefs, a filing can be deemed insincere (and therefore evaded) because it bucks the widespread mythology about the tax, and surely no one really doubts what everybody knows about the tax?!*
The answer, I believe, is the introduction into the record of an affidavit very explicitly-targeted at this last-ditch dodge. An example of such an affidavit will be found here. While everyone may feel inclined to customize testimony for this purpose, I have made an effort to incorporate in this example all the key points I believe must be made in order for it to have its proper effect, and none that I think are optional or can be safely omitted. Of course, what is said on such a statement must be true for the one signing it, so that is a yardstick that must be applied, but I think this should pose no problem for any actually-CtC-educated plaintiff.
Language explaining the submission of the instrument in any given case will necessarily have to be customized, but I suggest consideration of something along the lines of the following:
"In order to forestall any effort by the Defendant United States to evade the substance of Plaintiff's Complaint and prosecution with the specious assertion that Plaintiff's filed claim(s) for refund, or any attestations connected therewith are false or in any way insincere, Plaintiff submits the attached affidavit into the record of this case."
BTW, I think an affidavit of this sort is potentially useful in any tax-related legal contest, not just in support of a suit to compel a refund. Other than in cases where gross errors of arithmetic are involved, ALL government efforts to evade, overcome or penalize educated filings are, in one way or another, going to rest on an attempt to have the filing deemed insincere.
Here is the ruling discussed above. It will be noted that some word-count is burned misrepresenting the plaintiffs' argument so as to provide a foothold for some gratuitous and either grossly misinformed or deliberately misleading dicta about "includes" which is thrown in as a footnote and for an opportunity to cite some irrelevant (and deeply-flawed) rulings to provide an appearance of studiousness. It was actually the government which made the references used by the court as the grounds for trotting out this nonsense. The only reference by the plaintiffs to the "includes" issue was while denying the government's false ascription of typical tax protester nonsense about "wages" to them.
But in any event, this was all just a distracting and meaningless sideshow. The only thing actually held in the case is the evasion quoted above-- that the claim was supposedly insincere, and therefore could be disregarded.
In fact, in a fine bit of irony it can be fairly said that these meaningless digressions are manifestly insincere. If the DOJ or court actually believed what they want their audience to believe about "includes", for instance, the government would have pressed, and the court would have issued, a ruling holding the plaintiffs' earnings to be "income" and subject to the tax, and that would have been the basis for the plaintiffs' defeat. Such an outcome would actually further the government's "frighten people away from CtC" agenda, and anyone above room temperature knows they would have done this in a heartbeat if they could have.
But instead we get this simple evasion of the claim-- a dodge that shouts to the rooftops that the claim is objectively valid. This outcome actually undermines the government campaign against CtC, and it is obvious that it was resorted-to because it all they've got.
By the way, I have not bothered to discuss the self-serving and completely false characterization of these litigants as "tax protesters" in the opening sentence of this ruling. Nor have I mentioned the several equally-self-serving references to their earnings as "income".
Those reading this will likely already know to brush past this sort of adverse presumptive nonsense as just a natural part of the landscape in a venue like this, much like the inevitable odors one encounters at the zoo. Such readers will recognize that ad hominem smears are reflexive in the mouths of those intending to do ill; and that if there were any actual support for the "income" labels, the ruling would have been all about that, rather than the dodge to which the court was forced to resort when all is said and done.
*Understand that the "sincerity of belief" issue in regard to "an honest effort to comply with the law" has nothing whatever to do with the correctness of the belief. Correctness and incorrectness play out through challenges to the numbers on a return, if any such challenges are made.