A Few Words About Audits

Like the question of what belongs on a return, it's all context, context, context.

I'M SURE EVERYONE UNDERSTANDS that everything anyone hands the guy at H&R Block is automatically and unavoidably taken as being declared to be taxable activity-related. "Taxable-activity-related" is the context in which tax-preparers do their thing, and any document brought to them as part of a request to do tax calculations will be taken as relevant to that context.

It can't be otherwise, outside of very narrow special cases in which even a federally-connected version of any given activity isn't subject to the tax. After all, other than as regards economic activity which is under no circumstances subject to the tax, the guy at H&R Block is in no position to say that any given thing that might be given him ISN'T tax-related. He is not that privy to his client's affairs.

The H&R Block guy might pull out from a document dump a client's records of receiving a gift, and not include it in "income" because no kind of gift receipt is taxable. But if he's given documents about a guy's plumbing business, he'll assume that it is being declared to be an "income taxable" plumbing business, 'cause otherwise why would it be given to him in the context of tax-return-preparation?

So, only a crazy person would just bring every document in his or her possession related to overall economic activities and rely on the H&R Block guy to distinguish between the tax-related stuff and the non-tax-related stuff. They don't have the knowledge, and that's not their job.

A TAX AUDIT IS EXACTLY THE SAME. A tax audit is a forensic examination and analysis of tax-related information. It's not a general examination of all economic activity.

There's no authority for a tax agency to just dig through and examine every document related to anybody's overall economic activity. A law enforcement agent might get authorization for such a search, pursuant to a warrant based on a sworn allegation establishing probable cause that evidence of a crime will be discovered by the search. But a tax audit can only demand the production of books and records related to "income" activities.

Consequently, the limitation of the audit authority creates a context in which it is exercised. Any response to that exercise will be colored by that context, such that any documents produced in response to an audit summons will be reasonably and unavoidably taken as being declared by the respondent to be "income"-related (meaning that the activities to which those documents relate will be taken to be income-taxable activities).

Like with the H&R Block guy, if one brings documents related to one's plumbing business to an audit, it will be assumed that one is declaring one's plumbing business to be the taxable kind of plumbing business. Like with the H&R Block guy, it falls to the audit respondent to distinguish between what (if any) of his or her economic activity is actually relevant to an "income tax" audit and what is not, and only present the one.

In short, an audit only has authority to examine taxable activities and events, and the records related thereto. Anything brought in will be presumed to be so related, by implicit declaration of the one who brought them (or who gave them to the one who brought them, if that is a third-party service-provider, like an accountant).

NOTE: A nice judicial expression of the "context" doctrine discussed above, and of the limits of the audit and examination authority can be found here.

 NOTE II: I hope everyone will recognize how the reality of tax audits as just explained clarifies what some have long imagined to be Fourth Amendment violations inexplicably allowed by the courts. As explained, a tax audit is NOT a Fourth-Amendment-violating general poke-through of one's papers. It is only an examination of records related to the exercise of privileged activities.

What is mistaken to be an inexplicably-permitted general warrant is just the vaporware product of those who don't understand the limits of the tax and therefore ignorantly assume that the "books and records" demand encompasses ALL books and records, not just those related to engaging in federally-privileged activities (the opportunity for which carries with it an implicit or explicit agreement to allow such examinations of relevant records).

Importantly, by flipping that coin around, the "books and records" examination authority serves to demonstrate the actual limits of the tax. If the examination authority DID extend to ALL books and records, and without probable cause or authorization as a side effect of choosing to exercise a privilege, it could not co-exist with the Fourth Amendment.

Since the examination authority DOES co-exist with the amendment, the authority must be limited and arise by agreement. These things can only be true if the tax itself is limited and of the nature of an excise upon the voluntarily-undertaken exercise of privilege.

NOTE III: I hope you all realize that being able to use liberating information like this without obnoxious and stressful push-back from ignorance or craft rests on lots of Americans knowing it (which means lots of Americans knowing the truth about the tax). There's a reason why I say over and over and over: SPREADING THE WORD IS JOB ONE!! Get books and share them; forward this page to everyone, over and over, all the time.

"A nation of sheep will beget a government of wolves."

-Edward R. Murrow