I've read the book, but I still don't understand!
("Help!!-II: My light bulb is burning, and I'm sure I've done everything properly, but this tax agency is still harassing me!" will be found below)
Q. I read the book, but I still don't understand! What do I do now?!
A. First and foremost read the book again (and a third time, if necessary). You won't be the first to have your "light bulb moment" wait until after a second or third reading to arrive.
It's important to understand that the main difficulty most people have in gaining command of this subject is really nothing more than overcoming previous misunderstandings about the tax (and about the fundamental nature of our form of government). This is not surprising, when you think about it. These misunderstandings have been drilled into Americans all their lives by tax agencies and the symbionts of those agencies in the legal, accounting and "human resources" industries (and, in many cases, have been made even more complex and difficult to eradicate by the influence of additional misunderstandings peddled by non-CtC-educated activists in the "tax honesty" community.)
The process of overcoming these misunderstandings is not unlike that of viewing an optical novelty in which the same image can be perceived two different ways-- once you are aware of both perspectives:
Is it a young woman turned away from you, or an old woman in full profile?
Do you see a vase, or two profiles?
Are the black sides the tops or the bottoms of their respective cubes (or, are we looking at this object from beneath it or above it)?
Even when one knows what to look for, or how to look at something, the new perception must be repeatedly reinforced before it stops being automatically pushed aside by the old. Americans have been thoroughly conditioned to certain key misperceptions (the most significant being the erroneous notion that when used in the context of the tax, the term "income" has the meaning of the common word 'income'-- that is, "all that comes in"). That conditioning is constantly reinforced in our day-to-day lives. The liberating truth can require a lot of competing reinforcement before it takes root, especially since the misunderstandings to be overcome go well beyond merely the meaning of "income", and each such misunderstanding tends to invoke the others.
Thus, even if one gets a handle on a concept at some point during study, that grasp will be undermined by the next perceptual challenge, which will involve overcoming yet another sophisticated conditioning of perception relying on the same misunderstanding just overcome previously.
The "cube" illusion above is a good model for this. Even after learning to perceive the bottom cube as being seen from beneath, for instance,
an abrupt shift of attention to the next row-- or to the whole image-- introduces ambiguous visual cues which encourage the perception to revert to the more familiar mode. This is why I strongly recommend reading CtC from start to finish with as little interruption as possible in its 'Introduction'.
When once those misunderstandings have been overcome, and that "light bulb moment" happens, suddenly everything will become very self-evident, including how to fill things out, how to respond to tax agency correspondences, how (or whether it is possible) to rectify past mistakes. So, again, the number-one response to "Help!" is, "Re-read the book".
The re-reading of CtC can (and should) be supplemented by taking in one or more of the several introductory presentations of the material found at www.losthorizons.com/It'sTime.htm, www.losthorizons.com/Movie.htm, and www.losthorizons.com/Intro.pdf. Each of these presents a broad outline of the reality of the "income" tax (along with more focused attention to certain key aspects of the tax), but does so in its own way. Even if you'd seen these introductions before reading the book, one of them may well prove to be your light-switch all by itself, afterwards.
Additionally, and in any event (that is, even if your light is shining bright and steady), be sure to read the supplemental appendix material found here, and the 'Frequently Asked Questions' found here.
As with all material presented on this site and in my books, I very, very strongly encourage you to read every word! Thanks to the weariness of my fingers, and my pile of worn-out keyboards, no one is more aware than I that this often means a lot of reading. But doing it is really very important. Remember, what is being sought here is a successful and lasting replacement of a lot of deeply inculcated beliefs with a new understanding of a big subject. It will be the nature of those beliefs to constantly whisper into your mind, "You can skim through this-- we already know all about this part of the picture..." , even while your conscious purpose is to purge those beliefs and replace them with accurate information and understanding.
Beliefs acquired from the "tax honesty" community will be the most persistent and subtle in their undermining of your effort, as many of them will bear a strong superficial resemblance to the truth. Indeed, some "tax honesty community" notions contain what would be completely accurate representations of certain isolated aspects of the tax, if those representations were taken out of the context in which they are offered and put into one that is correct and comprehensive. Consequently, a good rule by which to study is, "If something strikes you as familiar, read even more carefully than usual. Furthermore, plan to re-visit that concept or aspect after everything else has been taken in, and after the overall context in which the tax exists-- which gives each element its legal and practical character-- is firmly in your mind!"
What To NOT Do:
1. DON'T seek the assistance or input of anyone who doesn't have at least one victory displayed on this site, even if he or she claims to be a student of CtC, or to "know all about the tax". This includes "tax honesty gurus", "mainstream" tax experts, your dad or your best friend. Remember, the key roadblocks to understanding the tax are the common (and not-so-common) misperceptions held (and promoted or mindlessly reinforced) by precisely these same folks, and especially by those who claim (or even really believe) that they "know all about the tax". (Read this carefully.)
2. DON'T go hunting for some "piece of the puzzle" you imagine must be missing from CtC for some reason, the lack of which must be why your light bulb hasn't gone off. There is no "missing piece". You've just got to continue to study until you really see the pieces that are presented to you in the book. (You will.)
3. DON'T confuse yourself with expectations that the truth about the tax (the "puzzle") is phenomenally complicated. It's not. There's a big, concerted (and sometimes complicated) effort underway at all times to make activities/receipts which aren't taxable appear to be so; and often each of the two classes of activities/receipts are confusingly co-mingled (such as in investment packages). Sorting these out can be time-consuming, but at bottom is just a matter of careful attention, and the thoughtful and logical application of the simple realities of the law to the individual details of any given situation. But the fundamental truth about the tax is almost achingly simple (and has nothing whatever to do with any elaborate or esoteric legal subtleties, quirks or conspiracies-- see this page for more on this subject).
4. DON'T begin or pursue your education in this area with the purpose of solving some "existing tax situation". If you REALLY have an existing "tax situation", you probably need a CPA or a tax attorney. However, most people who IMAGINE they have an existing "tax situation" have nothing of the kind-- they actually have a "tax allegations situation". Learning the truth about the tax will sort this out, and that sorting must be done first, and in isolation. It is a mistake to go into the study intending to discover how to fill out "Schedule Z" when the more fundamental question is whether you should be filling out "schedules" at all.
5. DON'T let yourself be fooled or confused by the fact that the IRS and others whose fame, fortune or institutional mission are threatened by the spread of the knowledge communicated in CtC have not just surrendered to that knowledge (other than by quietly and uninterruptedly honoring proper filings by CtC-educated Americans for years now), and gone off to look for new jobs. Don't expect to find a "piece of the puzzle" that is the "off switch" for blustery efforts to put the CtC-genie back in the bottle, or conclude that because there is no such piece the puzzle must not be complete. Keep in mind what's at stake, and that there is no downside to those whose oxen are gored by CtC for trying to confuse, misdirect and dissuade you and everyone else.
OK, you've thoroughly read CtC and made the knowledge of the truth of the "income" tax your own. You've stood up and acted on behalf of the rule of law, using your new knowledge and understanding.
You feel good, having finally exercised your own authority as intended and provided for by the founders of this great experiment in self-government, by which is meant a test of the proposition that individuals left in control of their own resources and powers will act responsibly, rather than letting themselves be manipulated into serfdom by intimidation, demagogues, scoundrels or corruption.
But the IRS, or some state tax agency, is still-- or has begun-- sending threats and notices and all manner of scary stuff in the mail!!!
What's Going On??!!
What Do I Do Now??!!
1. Figure out what is really going on: Most dedicated agency harassment is due to past practices of non-filing, past filings influenced by "tax honesty" misunderstandings, or past filings which have since been recognized as having been in error, and are being amended.
For instance, in the case of any kind of collections or harassment activity concerning a year for which an accurate, proper return has been filed, but belatedly-- either as the first return ever filed for that year, or in replacement or amendment of one filed in ignorance at an earlier time-- the adverse activity will almost invariably be rooted in the previous non-filing or the earlier return, even though the timing of the adverse activity may coincide with the filing of the accurate, proper return.
In the latter case (an amending return), if the earlier (original) return had declared one's receipts to be "income", that declaration will be being taken as final, and liabilities and (perhaps) penalties and so forth will be being calculated accordingly, with the new, correcting return being studiously ignored. The unfortunate fact is, although the "Secretary" IS obliged to return amounts improperly collected in response to claims filed within three years-- thus creating some ambiguity on this point-- there is nothing in the law of which I am aware that explicitly requires the acceptance of an amended return, even during the three years after the original filing. Correcting previous returns filed in misunderstanding is therefore somewhat legally quirky.
The other kind of previously-filed return that can be the cause of legitimate adverse tax agency attention is one that was technically defective (such as is typically true of a "Schiff"- or "861"-style return-- or any other "tax honesty movement" filing, for that matter) and therefore has been treated as a nullity-- that is, as never having been filed, other than for purposes of assessing (or at least, asserting: see 2 & 3 below) a "frivolous" penalty. Such filings often DO qualify as "frivolous".
In the case of a technically defective original return OR no original return having been timely filed at all, the failure to have timely filed will serve as a pretext for the creation and exercise of a "Substitute for Return". This is a calculating module by which unrebutted "information return" testimony-- the testimony introduced on W-2s, 1099s or K-1s-- is turned into a presumptive liability and the basis for collections activity. An eventual original or replacement return will be studiously ignored for as long as possible, in the hope that the filer will misunderstand the activity, presume it to have resulted from the filing of the educated return, withdraw that return and stand down. (Tardiness of filing in the face of a "Notice of Deficiency" can have more serious ramifications-- see #3 below for more on this.)
In either case (amended or belated original filings), the belatedly-filed accurate, proper returns will be being subjected to a "Who's on first" routine. Those responsible for the "collections" activities will disingenuously pretend to be unaware of the new realities of the legal situation concerning the period involved.
Sometimes, addressing that pretense directly, by copying the individual tax-agency actor responsible for the collections behavior with the newly-filed return (with steps taken to make delivery provable), promptly resolves the misbehavior. Examples of this sort of resolution can be seen here, such as the Notice of Deficiency "Closing Notices" issued after allegations of deficiencies were responded to with copies of accurate, proper filed returns. Generally speaking, though, correcting the effects of non-filing or errant prior filings is going to be an uphill battle; and in any event, understanding what is really going on is critical to successfully addressing the situation.
NEVER FORGET THAT ANY TAX AGENCY ATTEMPT TO RESIST A PROPER, ACCURATE RETURN WILL ALWAYS AMOUNT TO TRYING TO EVADE THE RETURN. THIS IS DONE BY PRETENDING THAT THE INCONVENIENT RETURNS NEVER ARRIVED AT THE AGENCY (OR ONTO THE DESK OF ANY PARTICULAR AGENT); THAT THEY DON'T MEAN WHAT THEY SAY; OR THAT THEY QUALIFY AS "FRIVOLOUS" AND CAN THEREFORE BE IGNORED (WHICH LATTER PRETENSE ALSO HAS THE BENEFIT OF PROVIDING AN EXCUSE FOR TRYING TO INTIMIDATE THE FILER INTO WITHDRAWING THE RETURN).
(By the way, it is worth observing that another late-filing-related pretext for adverse-- or balky-- agency reaction is the filing of a claim for refund after the passage of the three-year "lookback" period from the 15th day of the fourth month following the close of the year in which the claimed property was withheld or paid-in. Click here and here for more on this.)
2. Keep firmly in mind certain adamantine realities, such as that no matter how blustery and dire-sounding an assertion of liability, or threats about collecting a liability, may be, until there has been a technically-sufficient assessment, it's all hot air (and even a technically-sufficient assessment may still be legally invalid).
"Tax liability is a condition precedent to the demand. Merely demanding payment, even repeatedly, does not cause liability. For the condition precedent of liability to be met, there must be a lawful assessment, either a voluntary one by the taxpayer or one procedurally proper by the IRS. Because this country's income tax system is based on voluntary self-assessment, rather than distraint, Flora v. United States, 362 U.S. 145, 176, 80 S.Ct. 630, 646-47, 4 L.Ed.2d 623 (1960), the Service may assess the tax only in certain circumstances and in conformity with proper procedures."
Bothke v. Terry, 713 F. 2d 1405, at 1414 (1983).
The statutory provisions regarding a technically-sufficient assessment can be found here (along with an explanation of why there can be no valid assessment in conflict with the the self-assessment-- even a self-assessment of $0-- on a timely, accurate and proper return). Among those provisions is a requirement that evidence of the technically-sufficient assessment upon which any collection activity (including liens and levies) is based be furnished to the allegedly-liable individual upon request.
Since the initial posting of the information available at the link above, several CtC Warriors on the receiving end of blustery and scary-looking threats of assessable penalties and/or levies in regard to years for which timely, educated, accurate and proper returns were filed have made such requests. Unsurprisingly, none of these Warriors have ever received substantiation of the alleged assessment which would have to underlie the notices and threats they have received were those notices and threats actually legitimate rather than just efforts to harass, intimidate and confuse. (A few HAVE, comically, been sent "aggregate records of assessment" in an apparent effort to seduce them into imagining that assessments of them personally DO exist, and that their requests for substantiation have been satisfied...)
The IRS has long cultivated a fictional image of itself as a great blunderbuss of an agency, barely able to tie its own shoes and not to be expected to be able to respond accurately and in a timely way to such requests, but this is pure craft (and selectively deployed, of course-- used when it wishes to explain its failure to perform, and left in the closet when presenting itself in a courtroom). The reality is that the IRS is an ϋber-bureaucracy, in which everything that is done is done like a machine, and by the book.
If a legitimate notice of levy issues, it is because a technically-sufficient assessment is lying on the desktop of the issuer, and the book says, "Now that "A" is done, you must proceed to "B"". Thus, when a LEGITIMATE notice of levy (or lien, or whatever) issues, a copy of the assessment evidence is ready at hand and could be put in the mail the day the request arrives. If a copy of that evidence CAN'T be, or ISN'T, put in the mail promptly, the only rational conclusion is that no such assessment exists.
"The Tax Code represents the genius of legal fiction... The IRS has never really known why people pay the income tax... The IRS encourages voluntary compliance, through FEAR."
Jack Warren Wade Jr., former IRS officer in charge of the IRS Nationwide Revenue Officer Training Program, in his book ‘When You Owe The IRS’
"If the taxpayers of this country ever discovered that we operate on 98% bluff, the entire system will collapse."
Reported remark by an internal revenue service officer to Sen. Henry E. Bellmon (R. Okla.) on April 15, 1971.
3. Read #2 again, and yet again, if necessary to have it sink in and stick.
Whatever any notice may claim-- ranging from "Frivolous" to "We have changed your account..." to "Notice of Levy"-- if a tax liability is being alleged (or implied)-- whether an actual "tax" amount or penalties required by law to be "assessed as taxes" (such as the "frivolous" penalty)-- it is pure bluster if it is not backed by a valid assessment. There will be no valid assessment contrary to the self-assessment on a timely original, accurate and proper annual return*, nor any valid assessable penalties-- but in any case such assertions are easily tested by demanding evidence of the assessment.
*Note the inclusion of "timely". A certain level of sustained belatedness can possibly act as an effective exception. For instance, a failure to file in the face of "information return" testimony, and/or failure to respond to "deficiency" allegations (via a statutory "notice of deficiency", also know as a "90-day letter") and/or collections activities could effectively amount to an assessment, and might ultimately be beyond effective remediation. (See '(Things I Like To Keep In Mind When) Dealing With The Beast' for more about this...)
By the way, tax agencies have been known to argue that a formal assessment isn't a legally-necessary precursor to the existence of a liability, and this is actually true, in a vague, late-night-bull-session-in-the-law-school-dorm-after-a-couple-of-six-packs way. It's also utterly meaningless. While the actual occurrence of whatever causes any given legitimate tax obligation to arise is enough to theoretically create the obligation, that obligation is never more than a potential unless and until it becomes a defined liability by valid assessment. That is, even when a taxable activity actually HAS been engaged in, any resulting tax liability is merely speculative until an assessment has actually been made.
4. Understand and keep in mind that every possible effort to intimidate or confuse you into reversing yourself, staying silent about your victories, and/or simply keeping what you have learned to yourself will be an ongoing and increasingly vigorous project by those invested in the status quo.
Notices and letters which create an appearance that a tax agency is, or considers itself, free to disregard or adversely react to accurate and proper timely filings are a calculated part of this effort. DON'T BE MISLED BY MERE WORDS, BY COMPUTER-GENERATED MAIL SIGNED WITH FICTIONAL NAMES BY MACHINES, OR BY INVALID, UNSUPPORTED THREATS SUCH AS THOSE DISCUSSED ABOVE.
Don't be misled or unmanned by rumors, and be particularly wary of discouraging and distracting voices from within the "tax honesty community". Everyone reading these words will naturally and sensibly be skeptical and dismissive of those within the "tax professions" and bureaucracies, but equally likely to be initially open to the words of those who present themselves as sharing your interest in the truth. Unfortunately, the latter category is well-stocked with both outright tax agency plants and activists and "gurus" with contrary and self-serving agendas. Read (or review) this page thoroughly.
NEVER FORGET THAT ANY TAX AGENCY ATTEMPT TO RESIST A PROPER, ACCURATE RETURN WILL ALWAYS AMOUNT TO TRYING TO EVADE THE RETURN. THIS IS DONE BY PRETENDING THAT THE INCONVENIENT RETURNS NEVER ARRIVED AT THE AGENCY (OR ONTO THE DESK OF ANY PARTICULAR AGENT); THAT THEY DON'T MEAN WHAT THEY SAY; OR THAT THEY QUALIFY AS "FRIVOLOUS" AND CAN THEREFORE BE IGNORED (WHICH LATTER PRETENSE ALSO HAS THE BENEFIT OF PROVIDING AN EXCUSE FOR TRYING TO INTIMIDATE THE FILER INTO WITHDRAWING THE RETURN). (I say this twice for a reason-- it's really important to understand and remember this fact...)
5. Finally, use the links at the "Income Tax Subject Site Map" to study material specific to special issues.
Keep your mind clear, your common sense in gear and your spirit committed and confident. Stick to your truth, the facts, and the law.
NOTE: I realize some relatively new to the truth about the tax may imagine that there is some subtlety being invoked when I refer to a "proper" return. There is not. To understand what is meant by "proper", read through the entire chapter downloadable here. (Seriously. The entire chapter.)