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Legal Notes

An eclectic collection of observations, comments and resources

 

Some Observations Regarding Educated And Accurate Filing

THE FOLLOWING IS A SUMMARY of some basic concepts and issues related to filing knowledgeable, accurate and proper tax instruments. Each point or observation may or may not have relevance to any particular person's situation, and 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.

and...

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.

5. Most all of the above has long been posted amongst much other useful material on the FAQ pages. Make a point of staying up to date with those pages, and everything linked from the Site Map!!

6. For those new to filing educated returns and claims, the Bulletin Board has well over 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.

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What Qualifies As Taxable Privilege

It's pretty simple, really...

AS MIGHT BE IMAGINED, I am often asked by folks about whether their particular activities qualify for the "income" tax. I can't and won't answer such questions, since I can't possibly know every nuance of anyone else's activities.

However, there is nothing complicated about making such determinations. All that is needed is to ask yourself whether what you get paid for can only be done because of the existence of Uncle Sam.

MIND YOU, this question doesn't refer to any vague, "I can only get paid for what I do because Uncle Sam defends these shores..." or "...because Uncle Sam prints currency" or "builds roads" or "enforces copyrights", or anything whatever of that sort.

Nor does it refer to getting paid for doing things in which Uncle Sam is peripherally involved through some kind of licensure scheme. License fees are themselves taxes, and paying those taxes doesn't enable other taxes per se, as in, "I have a license from the government to do this thing, therefore I am only doing it with government permission and everything I make from doing it is "income"...".

INSTEAD, WHAT "ONLY BECAUSE OF THE EXISTENCE OF UNCLE SAM" MEANS is what literally can only be done because of the existence of Uncle Sam, in the same sense in which some things can only be done because of the existence of your Uncle Ernie. For instance, you can only work for Uncle Ernie because Uncle Ernie exists. You could do the same work for someone else, but working for Uncle Ernie relies on the existence of Uncle Ernie. Likewise, you can only invest in Uncle Ernie's business ventures because Uncle Ernie is out there creating them.

It is only a very specialized category of things that qualify for this taxable class. Whether the interstate highway system exists or not, any trucker can still deliver goods from point A to point B in his long-haul truck. It might be a longer or bumpier ride had the super-slab never been built, but making those deliveries (unless delivered from or to the federal government itself) doesn't require the existence of the federal government in order to be possible.

The trucker might need to pay a license fee (and/or register with the DOT, etc.) in order to travel on government roads, but traveling on government roads isn't any more the gainful activity by which a valid tax can arise on the productive act of delivering the goods than is anyone's use of government-built roads to commute to her factory or office.

Likewise, someone being paid by the feds for services provided to someone else, such as a doctor being paid by Medicaid for services provided to another citizen, isn't doing anything that can only be done due to the existence of the government (although the recipient of the services is).

Being paid isn't itself a taxable event. It is doing something federally-privileged that is taxable. Being paid for it simply provides a metric by which can be determined the amount of the taxable thing done.

HERE'S THE LONG AND THE SHORT OF IT: Anything you could do even if the federal government had never been created by the Articles of Confederation-- fix your neighbors pipes, sell your paintings, build and operate a hospital or a bank or a factory-- isn't a taxable exercise of privilege.

Anything that relies on the existence of the federal government might be a taxable exercise of privilege. (I say "might be" because not everything that COULD be taxable is taxed-- Congress has complete latitude within the universe of federally-privileged things.)

I HOPE THIS HELPS ANSWER SOME QUESTIONS out there. Those interested can find a much more comprehensive treatment of this subject interwoven throughout the CtC primer here or in the less comprehensive but very concise presentation here.

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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.

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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.

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Regarding Consent

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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All Pay Is Not "Wages"

PERIODICALLY, A LITIGANT OR CLAIMANT will run into some idiotic government-serving argument, assertion or assumption that all amounts paid by a boss to a worker for labor qualify as "wages" as the term is meant in tax law. This, of course, is because what DOES qualify as tax-context "wages" is a measure of taxable activities and of corresponding liability, and the revenue-hungry state would like everyone to treat every payment for labor as that kind of taxable-activity measurement.

But of course, "wage"-qualified payments are only a subset of all payments for labor. Happily, the law makes this plain even without needing to go to the fact that were it otherwise, and did the tax laws attempt to treat all pay for labor as a measure of tax liability (meaning, treat all work for which anyone is paid as a taxable activity), the tax would be a capitation, and could only be applied by apportionment.

For instance, the definition of "wages" in the tax law itself (at 26 U.S.C. 3401(a)) distinguishes that subset from the larger class of all pay for labor. The definition of "wages" is remuneration to an "employee" as defined at 3401(c). That definition incorporates as one of the exemplars of the subset of all workers "an...employee...of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing."

By listing as objects of the term being defined a particular subset of employees from out of the overall class of all employees, commonly-defined, the law is making clear that the term being defined does NOT encompass the overall class of which the listed and distinguished subset was already a part and which there would be no reason to mention if the overall and all-inclusive class was being described. Rather, the law is saying "The term "employee" being defined here consists of this subset of employees distinguished from out of the overall class 'employee', plus other workers for pay who share the characteristics which distinguish those explicitly listed as exemplars."

The statutory language at 26 U.S.C. 3402(p)(3)(B) helpfully illustrates and emphasizes this point. Here the law explicitly addresses (and thus admits the existence of) pay for labor which is not "wages" (red text added and some portions bolded for clarification):

(3) Authority for other voluntary withholding

The Secretary is authorized by regulations to provide for withholding—

(B) from any other [non-"wages"] type of payment with respect to which the Secretary finds that withholding would be appropriate under the provisions of this chapter, if the employer and employee, or the person making and the person receiving such other type of payment, agree to such withholding. Such agreement shall be in such form and manner as the Secretary may by regulations prescribe. For purposes of this chapter (and so much of subtitle F as relates to this chapter), remuneration or other payments with respect to which such agreement is made shall be treated as if they were wages paid by an employer to an employee to the extent that such remuneration is paid or other payments are made during the period for which the agreement is in effect.

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A Picture Is Worth A Thousand Words

WRITTEN ANALYSES ARE INDISPENSABLE to an accurate communication of the critical nuances and details of any subject. Still, sometimes the written presentation of the distinctions drawn in the law between the all-inclusive general class of something and the tax-related subclass of the thing can be confusing. This is especially so when the subclass distinguished in the law continues to be called by the same name as the general class, and the reader is obliged to resort to context in order to recognize the distinction.

Let's look at a couple of class/subclass distinctions in tax-law areas of widest interest-- those between "wages" relevant to the tax and the general class 'wages' as the word is commonly-defined. In order to help cement the distinctions in mind, I'm going to deploy some graphic aids. These images should assist greatly in communicating the true nature of the subclasses, and as a serendipity, serve to illustrate the effect of the "includes" rule of construction, as well.

WE'LL START WITH the basic division between ALL wages (pay for labor, generically) and the two "wage" subclasses relevant to the "federal income" (fed-come) tax. First, see the "wages" distinguished for purposes of Chapter 24, which are themselves dependent in that distinction on the statutory distinction between commonly-defined employees and "chapter 24 employees":

26 USC § 3401(c) Employee

For purposes of this chapter, the term ''employee'' includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term ''employee'' also includes an officer of a corporation.*

(*This only means an officer who is paid for services rendered, and not someone with merely an unpaid directorial position-- see IRS pub. 15A. Also, the corporations covered are only "United States corporations"-- see this for some particulars regarding this distinction.)

The graphic representation of this statutory definition is seen in the following diagram:

It is clear that the workers who qualify as "employees" for purposes of the chapter and its provisions are a subclass from among the larger generic class of ALL employees. This is just as the statute says, of course, and is also self-evident from the simple fact that a special definition is given at all. If the "employees" relevant to the tax were not a subclass of the overall class: 'employee', a special definition would be neither needed nor rational.

Looking at the definition of "wages" as used in chapter 24, we find another distinction drawn:

26 USC § 3401(a) Wages

For purposes of this chapter, the term ''wages'' means all remuneration (other than fees paid to a public official) for services performed by an employee [defined, for purposes of this chapter, as shown above]...

Here is the graphic representation of this distinction and relationship:

All told, then, we see that "wages" as meant in chapter 24 (the remuneration subject to that chapter's withholding provisions, and also serving as measure of taxable activity subject to the normal "subtitle A" fed-come tax) is only what is paid to statutorily-distinguished "employees" (a subclass of the greater class of ALL employees, and thus, plainly NOT "all employees").

Now, turning to chapter 21 "wages", we have to again first look at a primary distinction drawn in the law-- this time between commonly-defined 'employment' and statutorily-defined "employment":

26 USC § 3121(b) Employment

For purposes of this chapter, the term ''employment'' means any service, of whatever nature, performed by [a long, involved series of distinguished individuals, deploying dependencies resting on other dependencies]...

The graphic representation of this subclass distinguished from the class of ALL employment looks like this:

Turning to the "wages" definition for chapter 21, we find the statutorily-distinguished "employment" subclass invoked:

26 USC § 3121(a) Wages

For purposes of this chapter, the term ''wages'' means all remuneration for employment...

Again, looking at the graphic representation, we clearly see that "wages" to which the FICA sur-taxes apply are merely a subclass of all wages:

It's all pretty easy to take in and keep straight with the help of these diagrams, isn't it? A picture really IS worth a thousand words!

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