An eclectic collection of observations, comments and resources
BASED ON MY OWN READING OF THE RELEVANT LAWS AND RULES, my own experience, and my own observations, I have come to the following conclusions. They may or may not have relevance to any particular person's situation, and of course everyone should make their own studies and come to their own conclusions. They are presented in no particular order, and I suggest everyone read through them all.
1. If "information returns" by a payer (i.e., W-2s, 1099s, K-1s) make what are believed to be erroneous allegations of the payment of "wages", "non-employee-compensation" or other revenue purportedly in connection with the conduct of an "income-taxable" activity, a filing intended to be true, complete and correct would seek to rebut the erroneous allegations and provide what the filer believes to be the correct amounts. This might be done by, for instance:
A. Attaching sworn statements specifically rebutting the errors on those forms with correct entries to one's federal (and/or state and local) 1040. Examples are Forms 4852 (to rebut and replace errant W-2s or 1099-Rs), or photocopies of errant original 1099-MISCs (or any other type of 1099 other than the 1099-R) with correct information replacing incorrect entries, and a sworn statement added declaring the instrument to be a rebuttal of an erroneous 1099-(xx) known to have been submitted by the listed payer.
B. Using the rebuttal instruments as replacements for the erroneous "information returns" and the correct information from the rebutting instruments to complete one's 1040. For instance, if one has received erroneous W-2s and has created a rebutting 4852, where a 1040 asks for "wages received" and says to attach a W-2, one would declare the "wage" entry from line 7(a) of the 4852, and attach that form instead of the erroneous W-2.
Instruments rebutting erroneous 1099s (other than 1099-Rs) are attached to the return by themselves-- that is, not with some kind of schedule-- unless one really IS operating some kind of tax-relevant business or other activity, and one is acknowledging having had SOME "trade or business" "income", but just a different amount than what was reported on the erroneous 1099.
• If one engaged in no tax-relevant activities during the year there are likely no schedules that are appropriate for one's filing (unless, I suppose, one has something being carried over from a previous year in which something taxable WAS done...).
• If erroneous forms were included with a filing in which those erroneous forms are rebutted it would cause a contradiction in entries and make the return invalid and "frivolous", since everything included with a return is presumed to be attested to as correct by the filer.
• Failing to combine all amounts withheld as or for any kind of federal tax as a single figure on the line designated for "Federal income tax withheld", and/or failing to include and claim back any withheld amount while claiming back other amounts, is to create an apparent contradiction.
For instance, to report $0 "wages" and claim back amounts listed as withheld on a W-2 or 4852 as nominal "federal income tax" but to not also claim back amounts withheld as "Social Security tax" and "Medicare tax" would be to declare oneself to have not received "wages" as defined in 26 USC 3401(a) but to HAVE received "wages" as defined in 3121(a). Since both designations of "wages" refer to the same receipts and activities which produce them (with the latter being merely a surtax on a portion of the former) the declarations are contradictory of each other.
The same contradiction would arise if one listed anything as "Excess social security and tier 1 RRTA tax withheld", while denying having received 3121(a) "wages". One can only have "excess SS tax withheld" if one has had "SS tax" properly withheld up to the amount at which anything further becomes "excess".
2. A return is NOT an appropriate document for making legal arguments of any kind. To include a cover letter explaining what is seen in the return (such as that erroneous "information returns" have been rebutted with instruments completed and attached for that purpose) does no harm, but this is neither the time nor the place to be making assertions about whether one is or isn't an "employee", arguments about the nature of the tax, assertions that rebutted "information returns" contain "Bad Payer Data" and so forth. A return is just a statement of the amounts one knows and believes to be true, complete and correct in regard to each item inquired-about on the 1040, properly-understood as to its statutory meaning. It's neither a soap-box nor a legal brief; further, some kinds of arguments can actually invite a "frivolous" assertion.
3. Amounts improperly or erroneously collected, withheld, paid-in, what-have-you can only be claimed for refund looking back three years. On the other hand, rebuttals/corrections of erroneous assertions for their own sake, or as a response to collections efforts based on erroneous information returns, have no look-back limit. Learn more about both issues here.
4. Returns varying from (or attempting to supplement) the principles and points listed here, and/or reflecting notions not presented in CtC or on this site (exclusive of forum pages)-- such as adding "UCC" references to jurats, or otherwise marking-up or adding-to a return-- invite problems. I believe such variations are sometimes seen as reflecting an uncertainty (and therefore an insincerity) about one's filing, which can create a pretext for treating a return as "frivolous" and invalid. They also make one appear to be a soft target for harassment, ill-equipped to stand one's ground and deal competently with pushback, which is therefore more likely to be attempted.
6. For those new to filing educated returns and claims, the Bulletin Board has more than a thousand victories posted, hundreds of which include not only the check or notice or transcript, but also everything filed to make it happen. Examining any given half-dozen of these complete filings should equip anyone with a pretty clear picture of what's involved and what to do.
Why The Filer Is The "Petitioner" In Tax Court
A LOT OF FOLK HAVE BEEN TROUBLED OVER THE YEARS by what seems an improper role-reversal (and much more importantly, an improper shift in the burden of proof) in "Tax Court" proceedings. In Tax Court, the person targeted by a "Notice of Deficiency" is the one cast in the role of plaintiff, and bearing a burden of proof, with the IRS "determination" enjoying a presumption of correctness.
To many folks, this seems to be an example of the twisted character of law concerning the tax. But the perception is only due to a misunderstanding of "deficiencies" and the role of Tax Court.
The reason the filer is the "petitioner" (that is, the plaintiff) in a Tax Court proceeding even though it seems to him that he is not the one initiating the action is because "deficiency" proceedings actually only concern the applicability of exemptions, deductions, credits and the particular rate of tax claimed by the filer on his return in the first place-- all matters of variable applicability the propriety of which is within the expertise and authority of the IRS to determine. So actually, the filer HAS initiated the action-- he did so when he filed his return claiming those exemptions, deductions, credits and rate.
A Notice of Deficiency is merely an IRS determination concerning a filer's exemption, deduction, credit and rate claims. A Petition to Tax Court is simply a filer's request for a redetermination, if he disagrees with the IRS's conclusions and believes he can show why they are wrong.
The law defining "deficiency" does NOT provide for consideration of the correctness of the amount of "income" reported on a return, or assertions that all "income" was not reported. IRS assertions that the amount of "income" reported on a return were too low would necessarily put the agency in the plaintiff's role in the action, since under these circumstances it would be the one making the initiating (that is, positive) claims.
IN LARGE PART, CONFUSION HAS ARISEN ON THIS ISSUE because of the unfortunate practice of "non-filing" by some seriously misled folks. Non-filing creates a situation in which the IRS appears to be the initiator of the contest while still being spared the burdens of proof, because of an evolved doctrine concerning non-filing in the face of "information return" allegations.
Under this doctrine, if someone hasn't filed a return, he is deemed to have agreed with the assertions by payers (such as on W-2s and 1099s) of which he has been put on notice, and thus to have effectively answered those allegations with a declared amount of "income" equal to the payer allegations, no exemptions or deductions claimed, and the application of a tax rate of "0". The IRS responds with a Notice of Deficiency proposing the application of a single exemption, the standard deduction and what should be the correct rate of no tax to that presumptively-agreed-to amount of "income".
Because no original return appears in the record, and yet an "examination report" is offered listing amounts of "income", and a deficiency is proposed asserting an amount of tax due, it appears in such a case that the IRS has initiated everything and should be in the plaintiff's role bearing the burdens of proof in every respect. But it is really the non-filer's silent acquiescence to the "information return" allegations that is the starting point for the action.
The Measure Of "Reasonable" And "Credible"
IN 26 USC § 6201(d) IT IS SPECIFIED THAT,
(d) Required reasonable verification of information returns
In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under subpart B or C of part III of subchapter A of chapter 61 by a third party and the taxpayer has fully cooperated with the Secretary (including providing, within a reasonable period of time, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested by the Secretary), the Secretary shall have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return.
26 USC 7491(a) says the same (also with the requirement for its application that the Secretary 's reasonable requests have been cooperated with):
Sec. 7491. - Burden of proof
(a) Burden shifts where taxpayer produces credible evidence
(1) General rule
If, in any court proceeding, a taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the liability of the taxpayer for any tax imposed by subtitle A or B, the Secretary shall have the burden of proof with respect to such issue.
The measure of "reasonable" in 6201(d)'s "reasonable dispute" specification, and "credible" in the similar language of 7491(a) isn't how the dispute or evidence strikes a judge's fancy prior to an evidentiary hearing. "Reasonable" in that context means "constructed and presented in a way specified by protocols"-- that is, on the designated forms and without self-contradiction or other invalidating flaws.
A dispute or evidence presented in this reasonable and credible way then must be tested in a proper adversarial proceeding. In such a proceeding the government, pursuant to the specifications of 6201(d) and 7491(a), bears the burden of proof-- and a burden specifically requiring evidence outside of the "information return" being disputed, as explicitly said at the very end of 6201(d): "the Secretary shall have the burden of producing reasonable and probative information ... in addition to such information return." Only after such a proceeding can a judge then make a finding as to the disputed facts.
"Defendants are correct that the 1099s, on their own, do not create tax liability. Form 1099 is an informational return, filed by a third party to the relationship between the IRS and the taxpayer, which reports income as that third party believes it to be. The Internal Revenue Code makes it clear that a Form 1099 is not the final word on what a taxpayer's taxable income is. As provided in 26 U.S.C. § 6201(d):
"In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item reported on an information return ... by a third party ... the [IRS] shall bear have the burden of producing reasonable and probative information concerning such deficiency in addition to such information return."
The Tax Court has held that a Form 1099 is insufficient, on its own, to establish a taxpayer's taxable income. See Estate of Gryder v. Commissioner, T.C. Memo. 1993-141, 1993 WL 97427, 65 T.C.M. (CCH) 2298, T.C.M. (RIA) 93,141 (1993), citing Portillo v. Commissioner, 932 F.2d 1128 (5th Cir.1991). See also Portillo v. Commissioner, 988 F.2d 27, 29 (5th Cir. 1993) (a Form 1099 is "insufficient to form a rational foundation for the tax assessment against the [taxpayers in this case]."). Thus, while a Form 1099 can serve as the basis for the inception of an IRS investigation, it cannot and does not, on its own, create tax liability or establish how much income the taxpayer actually received."
Daines v. Alcatel, S.A., 105 F.Supp.2d 1153, 1155 E.D. Washington, 2000
"That which is not in fact the taxpayer's income cannot be made such by calling it income."
Hoeper v. Tax Comm'n of Wis., 284 US 206, 215 (1931)
"Credible evidence [under 7491(a)] is the quality of evidence which ... the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness)."
H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-995 (emphasis added)
Also see Mason v. Barnhart, 406 F.3d 962 (8th Cir., 2005); Rendall v. CIR, 535 F.3d 1221 (10th Circ., 2008) and cases cited; and Perez v. CIR, T.C. Summary Opinion 2009-94.
NOTE: Don't be misled by the appearance of the word "deficiency" in 6201(d)-- although the rule would apply in a tax court proceeding like in any other court proceeding, 6201 is not the section concerned with "deficiencies" as custom-defined in tax law and relevant to Tax Court proceedings, such as is discussed in the preceding article above. What is meant by "deficiency" as used here is not an indicator that the Secretary is authorized to assert "information return" allegations in statutorily-specified "deficiency proceedings" of the sort conducted in Tax Court, other than as discussed above concerning cases of non-filing.
NOTE II: Some material related to this topic can be found here.
AXIOMATICALLY, "CONSENT" CAN NEITHER BE COMPELLED nor required, and by definition, it is always the right of a party from whom it is needed or desired to withhold consent. By the same token, consent is irrelevant to what is mandatory, and to "withhold consent" from what is mandatory is legally meaningless. It imposes no harm on any party and has no effect for which remediation is needed or even possible; further, if consent cannot be withheld, then it IS not being withheld, regardless of what expressions are made.
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