To File or Not to File
It has been a year since I started this blog and my first post asked if you understood what you were doing when you file your Individual Income Tax Return 1040. A year later we now understand that the 1040 Form is a very old English contract called a Recognizance under the 13 century Statute of the Staple whereby you pledge your property, your freedom, and that of your family, in order to secure a government granted privilege. In England, that was usually the privilege of a foreign merchant to do business in a particular English jurisdiction under the auspices of the local mayor.
In America, that privilege is an event or occupation that is connected to a public office or license from the federal government. If you sign and file a 1040, you are saying that your earnings come from a federal office or privilege that you voluntarily assumed. Of course, the IRS never puts it that way, but if you want to volunteer to maintain the government, who are they to prevent you from being, as Joe Biden said, patriotic?
If you did not earn receipts from a federal privilege, but you "voluntarily comply" with the generally accepted view of the tax obligations under coercion, it is likely you are afraid of the modern version of the "Pain of the Staple" as it was called in old England, or put differently, the credible threat of force against you if you do not "comply". Can the government lawfully collect income taxes under this supposedly voluntary but actually coerced system? Do you in fact have, in most cases, a right NOT to volunteer to sign the 1040 recognizance?
The organized Tax Honesty movement arose in the 1970's and despite numerous setbacks including prison terms for some of its adherents still survives and influences the political discourse. If you question the federal income tax laws, there are essentially four ways you can go.
1. File and pay but support political change
2. Don't file
3. File an alternative 1040 Form
4. File an "informal claim for refund"
Let's briefly look at the options:
File and Pay
This will probably be the choice for most people. We would hope you would support tax honesty causes while you continue to be compliant. Write a letter to your Congress critter asking for real change to the tax code, not just a reduction in rates or a consumption or flat tax. How about rising up to demand an end to the unapportioned direct tax on labor? Didn't Ron Paul say that people should be able to "opt out" of the financial debt and tax system the Progressives have created?
Don't put "revenue neutrality" as the goal of tax reform. Ask the candidate if he believes it his duty to keep the federal government's revenue flow the same or greater, of if he would support a major cut in revenues from citizens because they became aware of the truth about the income tax. Ask why they have never given IRS Whistleblowers a public hearing. Demand they strengthen the Taxpayer Bill of Rights to confirm the right to a face to face hearing and to put a real cause of action against IRS employees who do not comply with due process. Demand oversight hearings on the frivolous filing penalties that have a chilling effect on political speech and are improperly assessed.
You DO NOT have to demand the repeal of the 16th Amendment. Instead you should scold any public figure who states there are three types of taxes: Direct, Indirect and Income. Insist they admit the Income tax belongs squarely in the Indirect excise tax category.
Remember that you are at risk even if you comply. No one accuses the IRS of being fair, or auditing only those who really need an audit. If you are a compliant filer, you have lost the right to question the basis of the tax, and can only argue that you do not owe the amount of tax claimed based on the complicated statutes and regulations written for taxpayers that deal with deductions and credits.
Those who do not wish to, or can't afford to, "contribute" to the federal leviathan often choose to simply not file. The law states that if you did not earn "income" above the statutory personal exemption you are not required to file. So if you believe your receipts do not constitute gross income under the law, you may decide to simply not file.
This approach has its benefits and pitfalls. Remember the government depends on third party information returns to give it a reason to believe you had taxable income. If you work on short term contracts with numerous payors, not filing may make sense. You may skate for years and not feel much pain. Perhaps you live a lot off the grid, do not have a stationary address, have some kind of alter ego like a corporate sole or family trust, etc., so it may make sense not to declare yourself to the state as a taxpayer. That is how many people become non taxpayers-they earn money informally, and soon they do not want to or are afraid to come in out of the cold.
Keep in mind if you do not file there is no statute of limitations. If the government does find out about your earnings, they can come after you many years after the fact, with penalties and interest added on. Non Filers lose some procedural rights. You can possibly be charged with willful failure to file. You may have tax liens against property you did not know existed.
File an Alternative 1040 Return
Since the early days of the Tax Honesty rebellion , people have attempted to protest on constitutional grounds by altering the 1040 Form. There was the "Fifth Amendment Return", where you would write "Fifth Amendment" on every line, in order to object to being forced to be a witness against yourself. The government's own Privacy Act Notice states that they can give your information to other government agencies, law enforcement or even foreign governments. This is a valid objection, but an invalid way of objecting. The courts have ruled this is not a valid return, and you can be fined or even prosecuted for willful failure to file using one of these old methods. Others cross out the jurat, or write over it with their own statement. This is also frowned upon in the courts. You can make a little addition to the jurat, such as UCC 1-308, which is a minor statement of reservation of rights, and it will be accepted. A substantial alteration to the jurat will invalidate the return. Others have defaced the return to claim that only gold or silver is money. All of these actions have not fared well in court, and the IRS has generally collected taxes and penalties, and some have court imposed sanctions as well.
Then after Irwin Schiff was released from prison for not filing and being public about it, he started to advocate the "zero-income" return. This involves filing a 1040 return with zeros in every line that asks for amount of "income" received or taxes due. The Ninth Circuit Court of Appeals ruled that a zero return is a valid return in 1980. After all, the court reasoned, zero is just a number. The judges were confident that the IRS could assess a tax from a form with zeros on it just as easily as they could with a form with other incorrect numbers. Irwin is currently languishing in a federal prison in the Ninth Circuit, but largely because he will not disclose the names of his clients, and for advocating rebellion in general in his books, especially "The Federal Mafia".
The Ninth Circuit got it right. If you file a zero income return and do not object to the information returns such W-2 and 1099 returns, that is all the IRS needs to assess a tax and fine you as well.
Pete Hendricksen then appeared and refined Irwin Schiff's zero income return idea by advocating the use of the Form 4852 Substitute for W-2 or 1099 filed along with the zero income 1040. Mr Hendricksen recognized how crucial the information returns are. They are in fact a testimony or accusation from third parties that purport to show that you earned gross income during the year that is subject to tax. That testimony is "prima facie valid" for legal purposes, meaning that on its face it is presumed correct. However, prima facie evidence can be rebutted in an administrative or judicial proceeding.
The "CTC educated return", named after his major book, "Cracking the Code", is his methodology to rebut the information returns and request refunds of taxes withheld. His "Warriors" send him copies of the forms , IRS correspondence and refund checks that show his methodology works. He claims he was the first person to receive a full refund of not only of all his withheld income tax, but his payroll taxes as well. He puts the amount of refunds his warriors have obtained at over 11 million and counting. The testimony on his website certainly looks like valid IRS correspondence. He does not sell an "untaxing" packet for hundreds of dollars . He simply offers his books and t-shirt for sale, and invites you to get his newsletter, attend his forums, and comply with the law as you believe it is written and applies to you. Nevertheless, he was convicted of "promoting an unlawful tax shelter scheme" and spent two years in prison. In 2013 his wife Doreen was acquitted of contempt of court charges stemming from her refusal to sign a "compliant" 1040 return after his conviction. He insists none of the Warriors who use his filing methodology have ever been convicted of a crime. However some have failed in civil litigation.
He has done extensive research on the history of the tax, and contrary to the generally accepted accounts, believes the income tax is essentially unchanged since 1862, when it was first laid during the Civil War. The 16th amendment merely corrected a technical ruling in 1895 by the Supreme court that declared that income from a source such as dividends and rents cannot be an excise tax but must be regarded as a direct tax subject to apportionment. The Court then ruled in the flagship case Brushaber vs Union Pacific Railroad (which the IRS also always references as affirming the constitutionality of the income tax) and a series of following cases that the 16th amendment granted no new powers of taxation. Judge White's majority opinion ruled that income derived from dividends or rent did not require apportionment because the 16th Amendment merely corrected the Pollock court's error by stating that income can be from "any source derived". An income tax on (privileged) rents and dividends is an excise tax and Brushaber returned the tax to that category, correcting the Pollock Court's decision that income derived from rents or dividends was a tax on the income AND the source, and therefore had to be apportioned as a direct tax. The Union Pacific Railroad was a federal corporation at the time, incorporated in the territory of Utah, and enjoyed enormous federal privilege. Dividends derived from the stock in the company was excise taxable as income that measured the amount of that privilege.
Mr. Hendricksen affirmatively states that the federal government can require every American earner in receipt of money paid to file a return since withholding was instituted in 1941. He regards withheld money as sort of an escrow account against the possibility of taxable income, and thus still belongs to the worker who can ask for it back. Hendricksen holds that since your receipts are not derived from an excise taxable event, but from your natural right to earn a living for yourself and your family, you have a constitutionally protected right to the refund. He cites Federalist 21, where Hamilton discusses excise taxes that are like "water in a spigot" that can be turned off by people unwilling to engage in excise taxable activities. He cites an early congressional hearing in which Milton Friedman, who as a young economist helped craft the withholding laws, asked if the federal government would withhold from taxpayers and non-taxpayers equally. The Committee said the nontaxpayers could apply for a refund.
This point, that the IRS has no choice but to refund taxes withheld from a non taxpayer, is crucial to understanding the methodology. This is where the rubber hits the road . If you follow Hendricksen's methodology, you are filing for the refund using the IRS forms and the IRS must take your word that you are a non taxpayer, unless they can produce evidence and witnesses independent of themselves to testify against you. Since they do not and cannot, they must violate your due process in order to contradict your sworn rebuttal of the information returns. The Taxpayer Bill of Rights states that if you make a "reasonable objection" to the information returns the burden of proof falls on the government to bring forth independent testimony from "competent fact witnesses" other than the returns to show you are liable for the tax. Do you believe that the CFO or Withholding Agent or Payroll Department head of your private non federally connected business you work for will testify in open court that they personally determined against your objection that you had taxable income? Especially if you have already revoked your signature and written to them well crafted administrative letters regarding the facts at hand? What facts do they have, other than the W-4 you signed under the impression you had to sign it to get the job?
Mr Hendricksen believes that the IRS is well aware that they must accept the declaration that you are a non taxpayer not subject to tax and process the refund. And his methodology does work, at least some or even most of the time. Read the testimony on his website from his "Warriors". However, some or most of the time the IRS sends the CTC educated returns to the "Frivolous Filing" unit in Ogden Utah, supposedly managed by one Maureen Green, whose letters and forms have the same tax ID whereby she claims to be both the manager and the examining officer, a violation of due process rights to know who is accusing you of having taxable income. We have no idea what percentage, or why, some returns are marked for the frivolous filing designation, while others are processed for the refund. Once you are in the frivolous filing pipeline, it can be very hard to escape. If you become "compliant" and submit "normal" 1040's from all the years that may be in question, the policy is that all the $5000 penalties for each year (!) are abated and instead only one $500 administrative fine is collected.
This does not mean that the frivolous filing penalty is correctly assessed. The law does not even mention "frivilous" filings, but only "false or fraudulent" filings. The Secretary has enlarged the statute by regulation, a no no in administrative law. There is substantial case law that indicates an ordinary individual filer cannot be the subject of the fine as written in IRC 6702, as it is only authorized for officers and employees of a corporation or other organized economic enterprise who have a duty to collect and turn over various excise taxes including withholding trust funds. There are other indications in the computer records of the IRS that indicate the Frivolous Submissions or Filing Fines are improperly , even fraudulently, generated. The IRS must bear the burden of proof by a preponderance of the evidence that the fine is correctly applied and generated. Nevertheless, at $5000 dollars a pop, these fines can mount up and actually be on their face far more of a liability than the actual tax liability. They are a serious deterrent to those who wish to assert their rights as nontaxpayers.
Pete Hendricksen advises to write back to the IRS and try to straighten them out and according to the testimony on his website this can work, at least some of the time. He is also working on a Writ of Mandamus that would require a federal court to rule the IRS must follow the law and process the CTC educated return.
FILE AN INFORMAL CLAIM FOR REFUND
Perhaps you have not filed in a while, and really don't want to start. Maybe you tried a CTC educated return and are now on the frivolous filing track. Perhaps you believe that you should file something but you honestly do not believe you owe an Individual Income Tax and do not want to support the welfare/warfare state if you don't have to. But you don't want to file a government form, for fear that will mark you as a "taxpayer" and could diminish your rights to question the tax itself.
The final alternative you have would be to file an "Informal Claim for Refund". The IRS divides returns into formal and informal. A formal return is always done on a government provided form, such as the 1040. An informal return is not done on a government provided form.
The law says you may file a "return or statement". In extreme cases, courts have ruled even a handwritten note on a napkin as simple as "I do not owe a tax" and signed by the individual is a return, at least for tolling the Statute of Limitations. Remember, if you do not file a return there is no statute of limitations. Not that the IRS will scrupulously abide by the limitations, but they are there, and can be invoked.
There is case law that describes what an informal claim for refund should consist of. In Beard vs Commissioner, the tax court stated that it should:
1. Purport to be a return of tax;
2. Contain sufficient information for the Secretary to calculate an income tax;
3. Be signed under penalty of perjury (this is known as "perfecting a claim"; and
4. Represent your honest and sincere attempt to meet any tax obligations you may have under the law.
How does a tax honesty individual file an informal claim for refund that meets these guidlines while still preserving his rightful status as a nontaxpayer?
The Tax Relief Team is doing ground breaking work in this area, working with Glen Ambort of "Taxation by Misrepresentation" to produce a good informal claim for refund and methodology to dispute information returns. If you feel this alternative meets your needs you are obviously interested in learning far more than the average Joe about the income tax and you should consider membership in the Tax Relief Team or similar group that is offering training including how to use the Freedom of Information Act and Privacy Act requests for information to obtain your IRS records and how to write administrative letters and even eventually to sue to correct the records the IRS keeps on you and for violations of due process.
The good thing about a properly done informal claim for refund is that it will likely not generate a frivolous filing notice. The bad thing is that they will not likely refund your money. The Internal Revenue Manual contradicts itself in that it states the IRS must accept and acknowledge these informal refund claims, but elsewhere it actually says they are not to be processed! Someone should be able to challenge this contradiction in court, but right now the status quo seems to be you will be safe from willful failure to file and some civil repercussions but you will have to take the IRS to court to have a chance for a refund, or in the alternative sue for damages due to violation of due process.
These are your options in 2014 and every tax year. I would hope you would stop and think what you are doing when you file or not file this year. The US is deeply in debt, barely recovering from a very serious recession, and carries a bloated federal behemoth that is visibly out of control and a real threat to our lives, property , finances and privacy. How you interact with the state is more serious than hitting a "like" button on Facebook. It is a moral as well as legal decision. Whatever you decide, I wish you well, and hope you will speak out for tax honesty and transparency in the important years ahead.