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A Summary Of The Meaning Of "Income"; And Three Commentaries On The Mechanics And Legal Effect Of "Non-Filing"

I recently received an inquiry from a self-professed non-filer seeking my opinion on a couple of points.   It has occurred to me that these questions, and the answers, may be of broad interest.  Thus, I offer below the inquiry, and a somewhat edited and expanded version of what I answered.  I hope that some find it of benefit.

Pete,

In your opinion then, WHAT type of income IS taxable for the average American? And, what do you tell those of us who no longer file and are fighting those wars with the IRS? Just curious. Thanks.

Dear Anonymous,

As to your first question, all "income" (using the legal term, rather than the common word of the same spelling and pronunciation-- which should always be done when dealing with the subject of the tax) is taxable.  The real question is, what is "income". An everyday, working definition would be:

“Income”: 

• Remuneration (either immediate or deferred) paid by the federal government including-- but not confined to-- “wages” (see below);

• Benefits paid by the federal government;

• The proceeds of, and from, federal ("United States") corporations or instrumentalities such as national banks, railroads, etc.;

• The proceeds of, and from, the conduct of a "trade or business" (the performance of the functions of a public office).

('Proceeds' means any form of related payment or gain, including, for example, dividends paid to stockholders, etc..  To invest in an activity is to engage in that activity.)

“Wages”:

• Remuneration of any kind, and by any name (including ‘salary’, ‘fee’, etc.) paid to any “employee” (see below), and to others in positions in the federal civil or military services.

“Employee”:

• A federal government worker or office-holder;

• Workers and office-holders of the local governments of the District of Columbia and the territories and possessions;

• Workers and office-holders of any federal, D.C., or territorial or possessions government agency or instrumentality;

• Officers of any federal corporation.

As to your second question, what I tell those who do not file (but who are the subjects of ‘information returns’, such as W-2’s and 1099’s) is that they are thereby leaving-- as the sole evidence on record-- affidavits which assert that they received "income", and which support a legally justifiable presumption of liability.  Anyone who refuses to file under such circumstances is going to experience a completely legal world of hurt.  In the case of those who are refusing to file because they did not (or believe they did not) receive (or engage in) anything taxable, this world of hurt is going to be experienced solely due to their unwillingness to put on their own affidavit (a return and related appropriate forms) what they are adamantly declaring, in every other possible way, to be true about their tax status.

Indeed, although such protestors imagine that they are declaring themselves to be not subject to the tax by refusing to file a return, exactly the opposite is true.  By not filing, and thus letting the evidence of others which assert payments of "income" to stand unchallenged, a non-filer acquiesces to those assertions-- and the consequent liabilities-- by silence.

Here is an analogy of the “income” tax scheme dynamic which might be helpful in understanding this (which, for the purpose of simplicity, disregards the definitional and constructional idiosyncrasies so fundamental to the actual scheme):

Imagine a legal structure in which parking on the street at night makes you subject to a tax, with the tax being the forfeiture of your car to the benefit of the city treasury.  Your neighbor has gone down to the police station and filed a statement declaring that he saw your car parked on the street last night (which we will posit, for the sake of this illustration, as being untrue).

Your neighbor sends you a copy of his statement, as required by law, thus both notifying you of what he has said, and effectively announcing the city's impending claim to the ownership of your car.  What do you do?  You can fume and write nasty letters, and/or simply hunker down in your house-- which is the response of a non-filer.  Or, you can go down to the city offices, get the proper form from the city clerk, and answer your neighbor's statement with your own affidavit.  That’s what a filer does.  There isn’t anything on the form that has the hidden effect of converting the filer into the status of a street-parker.  In fact, it is just the opposite.  To let the neighbor’s statement stand unchallenged DOES have that effect, because it is thus the only cognizable evidence on record-- and a street-parker is what that evidence declares you to be.  It is by rebutting that statement, in the fashion prescribed, that official street-parker status is shed.

What’s more (to continue our analogy), the law says that the city cannot itself dispute your affidavit, and must return your car if it has already taken possession.  On the other hand, if you don't file, the city just keeps your car, or sends a tow-truck around to your house.

In light of all this, why would anyone refuse to file the form?

Read ‘Cracking the Code- The Fascinating Truth About Taxation In America’!

Regards,
-Pete Hendrickson

(The following comments appeared in the Lost Horizons Newsletter on April 23rd, 2006.  Despite them being more than a little redundant in light of the foregoing, I am appending them here anyway, due to the importance of this subject.)

Non-Filing Only Benefits The IRS (Almost As Much As Filing Inaccurately)

Among the most pernicious, and persistent, bits of nonsense hindering many Americans otherwise ready and willing to stand and act on behalf of the rule of law in regard to the "income" tax is the notion that executing a tax return has inherently adverse legal effects.  In fact, nearly the exact opposite is clearly and demonstrably true-- FAILING to execute a return (of one flavor or another, depending on circumstances) has inherently adverse legal consequences.

This is because the vast majority of Americans are made the subject of one or more "information returns" (W-2, 1099s, K-1s, etc.) each year, alleging that taxable-activity-related payments were made to those Americans.  Indeed, pretty nearly EVERY work- or investment-related payment made to almost EVERY American during the course of EVERY year will be alleged to be connected with the exercise of a federal privilege (and thus to be taxable) by means of one of these instruments-- including payments which are NOT so related, and thus are NOT taxable.

Creating these information returns in connection with every payment, and leaving the correction of those which are erroneous to the payee at the end of the year, has become the default procedure of most American businesses, thanks to a relentless tax agency campaign to encourage just such behavior, conducted over the decades.  (Although this campaign includes strenuous efforts to conceal the legal import of information returns from those who create them, everyone is technically responsible for knowing such things.  Those who have been in the habit of creating these information returns will find the comments at 'It's Not Too Late' to be of interest.)

Obviously, any allegations on an information return-- as to both an amount paid, and its legal character-- are either correct, or incorrect.  If the allegations are correct, it can only be because several other things are true, including that the American being testified about on the information return has voluntarily exercised a taxable privilege, and thereby voluntarily subjected himself or herself to the requirements of the relevant internal revenue laws.  Submitting tax returns acknowledging such payments (and paying the resulting tax, of course) are among those requirements (which, arising as they do from a voluntary agreement, need not be published in the federal register, or conform to certain OMB provisions, etc.).

However, if those allegations are INCORRECT, a failure to answer them-- by introducing correcting testimony-- is to let them stand as the established facts-- and thus to accept the same legal obligations that would arise if they WERE true-- which include the requirements to file appropriate returns as noted above (and to pay the tax for which one is, by those unchallenged allegations, considered made liable).  The law provides a means for introducing correcting testimony: The filing of an accurate and proper tax return.  Thus, whether the allegations of others made on information returns are correct or incorrect, nothing but harm can result from a refusal to respond with a tax return.

So why would anyone refuse to file one?

The only reason I know of is that, decades ago, the idea arose in certain circles that the mere act of signing a tax return-- without regard to what is attested-to thereon-- performs a magical transformation of the signer into an entity whose every receipt is theoretically taxable.  (The transformation must be imagined to be retroactive, by the way, as a return deals with events which have already transpired.)  This notion, which is harbored even by those who will acknowledge that no language actually exists declaring such a thing to be true, draws primarily from two key misunderstandings of the law for its sustenance.

First, being ignorant of the "information return" mechanism in connection with which the use of a tax return for rebuttal arises, and therefore imagining the form's only use to be the acknowledgment of "income", those suffering from this notion conclude that to use the form is to invariably and necessarily assert (admit) that one is among those who MUST complete such a form-- that is, one who must acknowledge the receipt of "income"-- even when this is not true.

Intertwined with this assumption by those who view a tax return as a diabolical instrument-- and reflected by their disinterest in the actual content of the testimony submitted by way of the form-- is a belief that receipts acquire "income" taxable status because of who receives them (or, in variations on this misunderstanding, where the recipient is when receiving them, or the recipient's citizenship).  In reality, neither of these notions is true in the least respect-- receipts which are "income" taxable are so only because of the activity in connection with which they are received.  (For instance, that part of George Bush's earnings which is taxable is not so because he's president, or where he lives or works, etc., but because it is paid to him as a result of his activity as president.  "...the term gross income includes... ...in the case of the President of the United States... ...the compensation received as such."  If Mr. Bush were to take a night job at a 7-Eleven just down Pennsylvania Avenue from the White House, his earnings from THAT job would NOT be taxable, even though he remained president and continued to be paid taxable compensation as such.)  Further, nothing on a typical tax return automatically indicates or establishes the citizenship of the filer.

A complete forensic analysis of this "diabolical instrument" notion makes for a fascinating study, but it is beyond the scope of the current observation (find it here, instead.)  It is sufficient to establish that this fear of signing a return is misconceived, and, more, extremely counter-productive.  Earlier, I used the term "pernicious", and this is why: Whatever may be the individual motives of those who promote and embrace this fear, the fact is the only interest served by a failure to file a tax return in the face of erroneous allegations of "income" paid is that of the government-- which is thus left free to treat the allegations on every information return as established facts; to calculate and demand taxes due as a consequence; and to consider itself on solid legal ground while doing both.

Simply put, there is nothing that can be done by an American about whom an erroneous information return has been created that is more contrary to his or her interests than not filing in response-- other than signing an erroneous return as well, and converting the presumptive evidence of the information return into established facts in the eyes of the law.  (I'll take advantage of this moment to briefly address another myth hindering those who wish to testify truthfully, but are discouraged in the face of complicated fears: Nothing anyone signs, or has signed, has the legal effect of making one's receipts "income", and thus taxable, when they otherwise are not; or of functionally compromising or contradicting the testimony ultimately appearing on a return.  This includes W-4s, Social Security number applications, "employer identification number" applications, etc..  Each such signature may give color to presumptions about subsequent earnings, but nothing more than presumptions-- all of which are definitively resolved by the timely execution of an annual return.  The only exceptions would be other instruments executed within the context of the revenue laws, explicitly declaring one's receipts to represent "income"-- either directly, or by declaring them to be "wages", or consequent to "trade or business" activity, etc.; and even such exceptions would do no more than create a conflict to the extent that they were out of harmony with the testimony on a subsequent return.  See www.losthorizons.com/appendix.htm#3173 for related material.)

***

Another article on this subject, from the March 23, 2007 newsletter, saying the same, but with different words:

American Patriots!  Don't Sit On The Sidelines For One More Minute!  Silence Is Acquiescence, And Non-Filing Is Just Silence.

"Power concedes nothing without a demand.  It never did and it never will.  Find out just what any people will quietly submit to and you have the exact measure of the injustice and wrong which will be imposed on them, and these will continue till they have been resisted with either words or blows, or with both.  The limits of tyrants are prescribed by the endurance of those whom they suppress."
-Frederick Douglass 

The practice of "non-filing" is among the most pervasive, persistent, and utterly counter-productive mistakes plaguing the "tax honesty" community and keeping it from achieving its virtuous goals.  The practice is born of an understandable, but essentially thoughtless, "I'm mad as hell, and I'm not going to take it anymore!" attitude.  It is nurtured by the endless repetition within the community of the utterly irrelevant (and fundamentally mistaken) chant that "There is no law which makes (fill in your name/category/characteristic-of-choice) liable for the tax", and endless "arguments" of one variation or another to the effect that the tax CAN'T apply to [you], 'cause it only applies to corporations/foreigners/bug-eyed-green-aliens/citizens/residents/whatever-your-favorite-guru-has-misled-you-to-believe-matters...

The vague but influential impression left by these several atmospheric elements is that, "There is no way that I can be liable for the tax, therefore there is no way that I can be obliged to file a return!"  However, this conclusion would be sound only if NO ONE could be liable for the tax.

Some folks ARE liable for the tax, and the simple elegance of the "income" tax scheme is its reliance on "information returns" (W-2s, 1099s, and K-1s) made by others about those to whom they pay money, which specifically declare the recipients of the payments to be among those folks, and consequently to also be among those who ARE required to file a return.  Once such an "information return" has been filed about you, it makes no practical difference who IS (or could be) ACTUALLY liable.  YOU have been declared by testimony to be one of those persons, whoever or whatever they might be.

Once such a declaration is made, it must be answered or it will be taken as true, and the filing of a return is the only answer the taxing authorities will recognize.  There may be "no law" making you, John Doe, personally "liable for the tax or the filing of a return", but there IS a law making ANYONE who received $xxxx.xx "income" liable for those things, and so-and-so has testified that YOU DID.  Even if that testimony is wrong, unless and until you rebut it-- and in a legally sufficient manner cognizable by those to whom the "information return" testimony has been made-- you ARE liable, in the eyes of the law.  (Happily, once that rebuttal HAS been made, in the manner prescribed, the law says plainly that the matter is concluded.)

(By the way, simply declaring oneself loudly and forcefully to not be a corporation/foreigner/bug-eyed-green-alien/citizen/resident/whatever-your-guru-has-misled-you-to-believe-matters is insufficient and pointless.  First of all, your "guru" is wrong.  The tax is not in any way status- or condition-related-- it falls on the conduct of a taxable activity (the amount of which conduct is measured by the receipts procured thereby, which receipts are then somewhat misleadingly called "income"), and nothing else.  Anyone-- natural or artificial, wherever situated and of whatever status-- is equally capable of having engaged in a taxable activity during the period in which they are said to have done so on an "information return".  If you don't want to just take my word for it, read this, this and this, and if that doesn't do it for you, whatever is appropriate here.  In any event, even if you can't let go of the idea that just declaring yourself not to be a "whatever" is somehow sufficient to nullify an allegation of having engaged in a taxable activity, I'm sure you won't dispute that your declaration still has to be made, and in a manner legally appropriate to the allegations you are rebutting.)

***

I mentioned above that once a return is made, the issue of whether, and to what extent, any given person engaged in a taxable activity for the period involved is concluded, as a matter of law.  That is why the beneficiaries of general ignorance about the truth of the "income" tax scheme are engaged in a frantic, dedicated effort to discourage the filing of legally valid, accurate returns.

The greater part of this effort focuses on keeping motivated resistors of the tax from learning its limits, and from learning what constitutes a valid, legally sufficient return, by dissuading people from reading CtC and the related material on this site.  But the rest of it is devoted to maintaining a general fear and confusion about filing at all by encouraging and exploiting endless false ideas that the imposition of the tax is related to some status or another (as discussed above), along with a related, kind-of-intertwined belief that filing a return somehow constitutes, by itself, a damaging admission of status.

The essence of this latter belief is that the mere act of signing a tax return-- without regard to what is attested-to thereon-- performs a magical transformation of the signer into an entity whose every receipt is theoretically taxable.  (The transformation must be imagined to be retroactive, by the way, since a return deals with events which have already transpired.)

I have previously addressed this mistaken notion in considerable detail here, and will leave it to those who feel the need to read through that discussion.  I will simply summarize it for purposes of THIS discussion thusly: Although the notion of sticky infirmity arising from the use of a 1040 (or 4852, or whatever) is not supported by any evidence, logic, or legal principle, the use of such forms is not actually necessary for answering erroneous allegations of the conduct of a taxable activity anyway.  Homemade instruments are fine-- they simply must contain all of the requisite elements to their purpose, and lack any invalidating elements.  The "official" forms meet these criteria, but alternatives which duplicate those forms in every significant respect are just as good, legally.

***

What SHOULD be the most significant concern of anyone serious in his opposition to the misapplication of the federal taxing power is the effectiveness of his actions.  From that standpoint, non-filing is a complete bust.  I imagine that most who engage in the practice think of themselves as "conscientious objectors"-- refuseniks, as it were.  This is absolutely not so.

A refusenik denies the lawless state the benefit it wants from him-- his labor, talents, energy, etc..  There's no substitute solution for the state-- it simply loses.  But a non-filer gives it all up to the government, AND WITHOUT A LEGALLY MEANINGFUL PEEP, even while simultaneously muttering (or sometimes shouting from the rooftops) that the same government has no lawful claim to what is being taken.

Keep this straight, people: All the 'tude in the world notwithstanding, at the end of the day, the government gets to keep a non-filer's property, legally and properly.  The non-filer is furnished an opportunity to introduce a timely and legally relevant rebuttal of the allegation that he did something taxable, and instead, he stands mute.  The government watches the clock tick through the time for the filing of a rebuttal to the allegation, and when that clock goes "DING!", it gives the non-filer an appreciative (or scornful) nod, stuffs his money in its pocket, and walks away whistling.  The legal reality is simple.  Standing silent means relinquishing your own claim and endorsing the other guy's, by default.  In most cases, the "other guy" (the government) already has what was once (and could have remained) the non-filer's property in its hands.  It doesn't even have to go retrieve the property to enforce its newly established claim-- it just does a quick bookkeeping entry, moving the money from "escrow" to "in the bank".

In short, non-filing is hardly an effective means of addressing the improper application of the limited taxing authority we have given to the government.

***

From a "message" standpoint, non-filing is even worse.  Stuffing a gag into one's own mouth, and refusing to declare what one really believes to be true, complete and correct about one's activities, and consequent receipts gives the moral victory to the other side.  It makes the non-filer into the equivalent of a defendant who won't take the stand in his own defense; or the kid who slinks off the playground when the bully struts on.

Don't forget what's going on.  Someone has testified about that non-filer.  That testimony can't exactly be characterized as an accusation per se, but it IS an assertion that its object engaged in a specialized sort of activity, to the product of which the government has an inherent claim-of-right.  To acquiesce to this assertion by silence is to agree that the government DOES have an inherent claim of right to the product of that activity.  If all that had really been done was the exercise of one's private rights to conduct one's affairs, trade with one's neighbors, and so forth, then that acquiescence constitutes agreement that the government has an inherent claim-of-right to the product of that exercise.  That's just what the government wants everyone to believe, of course, but it's just what the non-filer claims to be arguing against.  Now, who's winning this argument?

The bottom line is this: When you leave an "information return" unanswered by refusing to file, you are endorsing its assertions, and all they imply.

*****

Tax agencies may have a habit of fulminating against non-filers, but they do so in the expectation that they are addressing Americans ignorant of their absolute right (and duty) to testify accurately on a return and associated forms, rather than to simply transcribe onto the return the testimony of those who have filed information return filers about them (and thus legally adopt that testimony as their own).  Now, for the first time in decades (if not the first time, period), Americans across the country are filing accurate and proper returns to correct erroneous information returns, and these tax agencies have a new tune.  Now the fulminations consist of blustery and absurd rationalizations and pretexts by which it is hoped returns that ARE filed can be EXCLUDED from the record, and the filers treated as non-filers!  (Note: The discussion entitled 'It's Time To Demand An End To This "Frivolous" Nonsense' has been updated with some important additional material which will be of great interest to everyone dealing with efforts to exclude their filings; and more can be found at 'The 'Every Which Way But Loose' Collection'.)

I most earnestly encourage everyone reading these words to circulate them as widely as possible.  Various IRS reports on the subject put the number of non-filing Americans at well over 10 million (I've seen estimates as high as 35 million).  Most, if not all, of these non-filers are simply making things easy on the tax agencies and the information return filers with whom they disagree, and making things hard on themselves.

Click here for a detailed discussion of the fact that signing a "U.S. Individual Tax Return" (or any other such) DOES NOT saddle one with some presumptive status as a "U.S. Individual", "U.S. citizen or resident" etc..

Click here to see how the tax, the requirement to file, and the individual liability are imposed