IRS Attacks California

 

      The IRS audits individuals at different rates in different parts of the country.  The State of California is getting increased attention from the IRS.  This is probably because of the increasing tax protest activity in the state.  The IRS is looking harder in California for people who do not file returns and the audit rate is four times higher in California than in the rest of the country.  In New York City, the highest-income district in the United States, the fraud audit rate fell to 208 in 1996 from 628 in 1992.  In Connecticut the suspected fraud audits dropped to 57 from 848.  Meanwhile, back taxes and penalties are increasing for the poor and declining for the rich.  This is because Congress directed the IRS to monitor the tax returns of the working poor more thoroughly in 1995.

 

      The attack against the working poor was to make sure that people eligible to get earned income credit do not get more than they are supposed to.  Between 1992 and 1996, the average increase in the tax bill that IRS auditors recommended for those making less than $25,000 more than doubled, to almost $5,700 from $2,500, while for those making more than $100,000, it fell 14.5 percent to $19,700 from $23,000.  This year about 170 million Americans will file approximately 120 million tax returns.  About one person in every 150 will be audited. In 1996, for example, the IRS audited approximately a 800,000 tax returns.  The IRS bases about a third of its audits on dif scores which are based on a statistical formula known only to the IRS: taxpayers who deviate the most from the norms are the ones that get an audit.

 

            The IRS is also under a budget and they have about fifteen percent less auditors than they did ten years ago.  The number of tax returns has increased about twelve percent in the last ten years. 

Check Out These Facts

 

1. The average family today pays more in taxes than it spends on food, clothing, and shelter combined.

2.  Over the past several decades, a majority of the growth in family income has gone to pay taxes.

3.  The average working Americans work 2 hours and 49 minutes of every eight-hour working day to pay taxes.  Most of that time, 1 hour and 53 minutes, will be spent working to pay federal taxes.

4.  Each year Americans devote 5.4 billion hours complying with the tax code, which is more time than it takes to produce every car, truck, and van made in the U.S.

5.  Americans spend over $200 billion each year on tax lawyers, accountants and other costs associated with tax compliance.

6.  The IRS sends out 8 billion pages of forms and instructions each year, which if laid end to end, would stretch 28 times the circumference of the earth.  Nearly 300,000 trees are cut down each year to produce the paper on which these IRS forms and instructions are printed.

7.  The IRS's tax rules and regulations have increased from less than 200 pages in 1913 to more than 7,000 pages in 1995.

8.  In 1993, taxpayers were overcharged $5 billion in penalties.

9.  The November 1996 issue of Money magazine asked 45 tax professionals to prepare a return for a fictional family.  No two prepares came up with the same tax total and not one preparer calculated what Money believed to be the correct federal income figure.  Fewer than one in four came within $1,000 of that figure.

10. 60 percent of taxpayers hire a professional tax preparer to complete their return when only a third of taxpayers itemize their deductions.

11.  The IRS provided 8.5 billion incorrect or incomplete answers to taxpayers in 1993.

12.  High marginal tax rates combined with multiple taxation of work, savings and investment are a drain on economic growth.  The income level of the U.S. could be 15 to 20 percent higher than today if these biases did not exist.  This translates to lost income of as much as $4,000 to $6,000 for the typical middle class family.  (This data is 10 years old, it is presented here to show you that the situation has gotten much worse and it continues to get worse.  When will it change?)

 

 

 

      The Offer in Compromise and the Statute of Limitations

 

      The statute of limitations on collections is 10 years from the date of assessment.  If you file an offer in compromise, the time is extended for one year plus the time that the offer was considered.  The running of the statute of limitations does not begin until the IRS formally rejects the offer in compromise.  In Cooper-Smith, 439 F2d 1095, the court held that the statute of limitations for bringing an action for collection of taxes after assessment was suspended while an offer in compromise was outstanding and for one year thereafter. 

 

      A very important case is Rohde, 415 F2d 695.  The court ruled that both the IRS and the taxpayer must sign the offer in compromise for the statute to be waived.  Regulation Section 301.6502(a)(2)(i) provides in part: "The extension of the statute of limitations shall become effective upon execution of the agreement by both the taxpayer and the district director."  Therefore, unless the district director executes the waiver, it is invalid.

 

      In Parenteau, 33 AFTR2d 74-841, the court held that an offer in compromise tolls the statute of limitations until the IRS declares an offer to be in default.  In Decker, 18 AFTR2d 5365 (D. Utah 1966); the court ruled that the statute of limitations is not suspended when the offer in compromise is rejected by the IRS.

More on Contempt

 

 

              The issue of criminal and civil contempt can get complicated.  The case of Spindelfabrik Suessen-Schurr v. Schubert and Salzer, 903 F.2d 1568 (Fed. Cir. 1990), clarifies the issue.  In Spindelfabrik, the Court decided that a flat sum of money unconditionally awarded to the opposing party as a "civil contempt" sanction "to ensure future compliance" is a criminal penalty that must be reversed if the procedures required for a criminal contempt conviction were not followed.

 

          Judges have both criminal and civil contempt powers and they can punish an individual with either civil or criminal contempt or both; but they must follow the correct procedures.

 

          The Federal Circuit stated that a civil contempt sanction is remedial and for the benefit of the complainant while a criminal contempt sentence is punitive and is to vindicate the authority of the court.  See Gompers v. Bucks Stove and Range Co., 221 U.S. 418, 31 S.Ct. 492 (1911). Civil proceedings may be used to coerce the defendant into compliance with the court's order or to compensate the complainant for losses.  When the court intends to make compensation, a fine which is payable to the complainant must be based upon the evidence of the complainant's actual loss.  See United States v. United Mine Workers, 330 US 258, 67 S.Ct.  677 (1947).

 

          In this case, the court determined that civil fines are conditional because they can be terminated once the contemnor purges himself of the contempt.  Criminal penalties cannot be purged; they penalize "yesterday's defiance rather than seeking to coerce tomorrow's compliance." Shillitani v. United States, 384 U.S. 364, 86 S. Ct. 1531 (1966).

 

          The fine in this case was unconditional and was to deter the defendants from future additional violations. The court concluded that the fine was criminal even though the district court described it as civil.  See United States v. Powers, 629 F.2d 619 (9th Cir. 1980).

 

              If you are subject to a contempt sanction, be sure the court has followed the proper procedures.

 

 

CIVIL AND CRIMINAL CONTEMPT

 

 

            If you are in a battle against the IRS, you need to know something about the issue of civil and criminal contempt. You can be held in contempt by a judge if you refuse to give testimony or records in response to a summons.  However, if you raise a defense that is viable, the court probably will not hold you in contempt.  If you get a summons for personal records; you have the right to stand on your Fifth Amendment Rights.  However, not all the judges in this country understand the law and some may not permit you to take the Fifth. 

 

            Contempt powers started with English Common Law where disobedience of writ under the King's seal was treated as contempt. Under the 1789 Act, the federal courts were given those powers that the English Courts had under common law. (Green v. U.S. NY 1958, 78 S. Ct 632).

 

            By 1831 Congress began to define the contempt powers of federal courts:

 

                 Under the Judiciary Act of 1789, the federal courts were vested with power to punish by fine or imprisonment, at the discretion of said court, all contempts of authority.  Congress did not define what acts constituted contempts, but left this, as well as the amount of punishment, to the judicial discretion of the courts.  Prior to 1831, the judges in several cases had punished criticisms of themselves or their decisions published in the press, as contempts of their authority, and to such an extent had this action been considered a usurpation by the public that impeachments had been instituted on account of such acts against several of the judges.  The impeachments failed, but resulted in the passage of the act of March 2, 1831, by Congress, which limited the acts for which the courts might thereafter punish for contempts of their authority to defined classes, U.S. v. Huff, D.C. Ga. 1913, 206 F 700.

 

            The power of a federal court to imprison a recalcitrant witness for contempt in an effort to make the witness testify is an inherent power which was possessed from the beginning by the federal courts in exercise of their equity jurisdiction, which parallels that exercised by the English Court of Chancery at the time the Constitution was formed. U.S. v.  Yates, D.C.Cal. 1952, 107 F.Supp. 412.

 

            The courts have defined contempt as an "intentional act" which is committed in defiance of authority and dignity of court. U.S. v. Panico, C.A.N.Y. 1962 308 F.2d 125; or contempt "is shown by forgetfulness, neglect, or failure of or indifference to duty. U.S. v. Ford, D.C. Mont. 1925, 9 F.2d 990.

 

            Contempt is classified as either "direct" or "indirect."  If contempt is committed in the presence of the court, it is direct O'Malley v. U.S., C.C.A.Mo. 1942, 138 F.2d 676.

 

            Contempt can be civil or criminal or both.  Civil contempt is a sanction to enforce compliance with an order of the court to compensate for losses or damages sustained by reason of noncompliance and may be imposed for prohibited acts irrespective of intent. McComb v. Jacksonville Paper Co., Fla. 1949, 69 S.Ct. 497, 336 U.S. 187. Contempt is civil when it is remedial and serves only the purposes of the complainant. Nye v. U.S., 61 S.Ct. 810.  The purpose of the punishment, rather than the character of the act punished, determines whether contempt is civil or criminal. Lamb v.Cramer, 62 S. Ct. 315. Criminal and civil proceedings for contempt are not mutually exclusive and the court can institute separate and independent proceedings for criminal contempt on a new citation. Parker v. U.S., 153 F.2d 66.

 

            Punishment in a civil contempt situation is given where the court wants to make a witness do something which he has been directed to do and has refused to do, whereas in criminal contempt, punishment is imposed for doing that which has been forbidden or for the violation of an order of the court, and it cannot undo or remedy the thing which has been done,  Leitstein v. Capital Co., 96 F.2d 23.

 

            Remember that the Court can hold you in contempt, either civilly or criminally before you attempt to stand up against the Court and claim that it does not "have jurisdiction over you."  If you take that position, you will likely waive your Constitutional Rights and you may be arrested and incarcerated until such time as you agree to testify. Be careful about following the advice of some of the outspoken individuals in the Freedom Movement who don't understand these principles.  Good luck and please be aware of the awesome contempt power of the Courts.

 

Some Basic Income Tax Decisions

 

      In 1894 Congress adopted an income tax which was later declared unconstitutional in Pollock v. Farmers' Loan and Trust Co, 157 U.S. 429, 15 S.Ct. 673.  The Pollock Court found that the income tax was a direct tax which could only be imposed if the tax was apportioned; since the tax was not apportioned, it was found unconstitutional.  Congress avoided the decision by passing the 16^thth Amendment was later interpreted in the case of Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 36 S.Ct. 236 (1916).  After the BrushaberStanton v. Baltic Mining Co., 240 U.S. 103 (1916) ruled that the 16^th Amendment conferred no new power of taxation.  Since then the courts have become very confused on the issue of the income tax.  In the case of United States v. Turano, 802 F.2d 10 (1^st Cir. 1986), the Court held that the "16^th Amendment eliminated the indirect/direct distinction as applied to taxes on income.  In Fiscalora v. Commissioner, 751 F.2d 85 (2^nd Cir. 1984), the court stated that the personal income tax was an indirect tax.  In United States v. Sitka, 845 F.2d 43 (2^nd Cir. 1988), the Court took the position that the income tax is direct. Amendment which was ratified in 1913.  The 16 case, the case of

 

                Furthermore, the courts cannot agree which statue requires the filing of tax returns.  In Commissioner v. Lane-Wells Co, 321 U.S. 219, the court noted that Section 54, the predecessor of Section 6001, governed the filing requirement.  But in Beard v. Commissioner, 793 F.2d 139, (6^thUnited States v. Neff, 954 F.2d 698, (11^th Cir. 1992), the Court ruled that Section 6012 governed the filing requirement.  And in United States v. Pilcher, 672 F.2d 875, (11^th Cir. 1982), the Court ruled that Section 7203 is the statue that requires the filing of returns. Cir. 1986), the court ruled that Section 6011 governed the filing requirement.  But in

 

            The fact is that the courts cannot agree on whether or not the income tax is a direct or an indirect tax and they cannot agree on which statute requires the filing of a tax return. The courts continue to send individuals off to jail for willful failure to file returns.  Isn't that a terrible travesty of justice to punish individual citizens for failing to understand a system that the courts themselves cannot understand?

GREAT QUOTES

 

"In a recent conversation with an official at the Internal Revenue Service, I was amazed when he told me that 'If the taxpayers of this country ever discover that the IRS operates on 90% bluff, the entire system will collapse'". - Henry

Bellmon, Senator (1969)

 

 

"If no information or return is filed, [the] Internal Revenue Service cannot assess you". - Gary Makovski, Special IRS Agent, testifying under oath in U.S. v. Lloyd

 

"The United States has a system of taxation by confession". - Hugo Black, Supreme Court Justice, in U.S. v. Kahriger

 

"Only the rare taxpayer would be likely to know that he could refuse to produce his records to IRS agents ... Who would believe the ironic truth that the cooperative taxpayer fares much worse than the individual who relies upon his constitutional rights". - Judge Cummings, U.S. Federal Judge in  U.S. v. Dickerson (7th Circuit 1969)

 

"Your income tax is 100 percent voluntary tax, and your liquor tax is 100 percent enforced tax. Now, the situation is as different as night and day...". - Dwight E. Avis, former head of the Alcohol and Tobacco Tax Division of the IRS, testifying before a House Ways and Means subcommittee in 1953.

 

"All we have to do now is to inform the public that the payment of social security taxes is voluntary and watch the mass exodus". - Walter E. Williams, John M. Olin Distinguished Professor of Economics at George Mason University in Fairfax, VA, January 24, 1996

 

"To lay with one hand the power of government on the property of the citizen, and with the other to bestow it on favored individuals ... is none the less robbery because it is ... called taxation". - United States Supreme Court in Loan Association v. Topeka (1874)

 

"... bank records are not the depositor's private papers and having given the information to the bank, the depositor has no legitimate expectation of continued privacy ... ". - United States Supreme Court in U.S. v. Miller

 

"... 100% of what is collected is absorbed solely by interest on the Federal Debt ... all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government". - 1984 Grace Commission report submitted to President Ronald Reagan

 

"Of all contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money". - Daniel Webster, lexicographer

 

"All the perplexities, confusion and distress in America rise ... from downright ignorance of the nature of coin, credit and circulation". - John Adams, in a letter to Thomas Jefferson in 1787

 

"I believe that banking institutions are more dangerous to our liberties than standing armies". - Thomas Jefferson

 

"Give me control over a nation's currency and I care not who makes its laws" -Baron M.A. Rothschild (1744 - 1812)

 

".. we conclude that the [Federal] Reserve Banks are not federal ... but are independent, privately owned and locally controlled corporations ... without day to day direction from the federal government." - 9th Circuit Court in Lewis v. United States, June 24, 1982

 

"If all bank loans were paid ... there would not be a dollar of coin or currency in circulation. Someone has to borrow every dollar we have in circulation. We are absolutely without a permanent money system". - Robert Hemphill, Federal Reserve Bank in Atlanta, in foreword to "100% Money" by Irving Fisher.

 

"America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves." - Abraham Lincoln

 

"We are going to impose our agenda on the coverage by dealing with issues and subjects that we choose to deal with".

- Richard M. Cohen, former Senior Producer of CBS political news.

 

"Our job is to give people not what they want, but what we decide they ought to have". - Richard Salant, former President of CBS News.

 

"Democracies have ever been spectacles of turbulence and contention have ever been found incompatible with personal security or the rights of property and have in general been as short in their lives as they have been violent in their deaths".- President James Madison

 

"It is not the function of our government to keep the citizen from falling into error it is the function of the citizen to keep the government from falling into error". - United States Supreme Court in American Communications Association v. Douds

 

"Fear can only prevail when victims are ignorant of the facts". - Thomas Jefferson

 

"None are more hopelessly enslaved than those who falsely believe they are free." - Johann W. Von Goethe

 

"They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - Benjamin Franklin

 

"He who knows nothing is nearer to the truth than he whose mind is filled with falsehoods and errors". - Thomas Jefferson

 

"In the beginning of a change, the patriot is a scarce man brave, hated, and scorned. When his cause succeeds, however, the timid join him, for then it costs nothing to be a patriot." - Samuel Clemens, author writing under the pen name "Mark Twain"

"The true danger is when liberty is nibbled away, for expedients, and by parts ... the only thing necessary for evil to triumph is for good men to do nothing." - Edmund Burke

 

"If a nation expects to be ignorant and free, it expects what never was and never will be ... The People cannot be safe without information. When the press is free, and every man is able to read, all is safe." - Thomas Jefferson

 

"The right to freedom being the gift of God, it is not in the power of man to alienate this gift and voluntarily become a slave". - Samuel Adams

 

"To sin by silence when they should protest makes cowards of men." - Abraham Lincoln

 

"Government big enough to supply everything you need is big enough to take everything you have ... The course of history shows that as a government grows, liberty decreases". - Thomas Jefferson

 

"Any truth is better than make-believe ... rather than love, than money, than fame, give me truth". - Henry David Thoreau

 

"Most people, sometime in their lives, stumble across truth. Most jump up, brush themselves off, and hurry on about their business as if nothing had happened." - Sir Winston Churchill

 

"I know of no safe depository of the ultimate powers of society but the people themselves, and if we think them not enlightened enough to exercise control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion". - Thomas Jefferson

 

 

 

 

Common Law Business Organizations

 

      Many people are setting up common law trusts (hereinafter referred to as CLT's to run their businesses.  How will they fare with this idea?

 

      Individuals who are selling CLT's as the ultimate way to avoid paying taxes are simply selling a sham.  Proponents of this concept take the position that because the organization is based on the common law right to contract that it does not have to file tax returns or pay taxes as it would have to do if it were a corporation or a trust.  The promoters also claim that once an individual's assets are transferred to the trust, it can pay personal expenses for the individual and that these expenses do not constitute taxable income.  The IRS would resolve this issue with tax law related to taxation of corporate benefits.  The fact is that many people who set up common law trusts are going to have a great deal of trouble in the future.  See U.S. v. Schmidt, 935 F.2d 1440 (4th Cir. 1991)(conviction for conspiracy to evade taxes); Zmuda v Comm'r 79 T.C. 714 (1982); (back taxes and negligence penalty). Keefower v. Comm'r 65 T.C.M. (CCH) 2999 (1993) back taxes and penalties for negligence and substantial underpayment).

      Be very careful about believing promoters of common law trusts.  If it sounds too good to be true, it probably is.

Inside the IRS

 

      What is it like inside the IRS?  What do IRS employees think of taxpayers?  They don't see us as hardworking and compliant.  They view us as cheaters and con men who are ripping off the government.  The taxpayers are the bad guys.  The IRS employees are the good guys.  One individual who worked for the IRS stated that: "During an audit, we used to watch taxpayers squirm and then later on we would laugh at them. 

 

      The IRS operates under the U. S. Treasury Department.  It currently has about 102,000 employees and it is the largest law-enforcement agency in the United States.  The IRS headquarters in Washington, D. C. has over 9,000 administrators.  There are four regional offices and thirty-three district offices. The IRS also has foreign offices for U. S. taxpayers living overseas and offices in Puerto Rico and Guam.  Each district office serves a specific geographic area and is responsible for four activities: examination, collection, criminal investigation (tax fraud), and taxpayer services.  The IRS' National Computer Center is located in Martinsburg, West Virginia.  The service centers receive the returns, process them, record the data, check the arithmetic and credit the accounts.

Independent Contractors vs. the IRS

 

      There are many individuals who have become independent contractors in recent years and the IRS is fighting back by denying independent contractor status.  Everytime an additional worker is classified as an independent contractor, the IRS loses tax dollars through unpaid social security and income taxes.  Because of the IRS' aggressive stance, it is more important than ever that individuals understand the law on this issue.  The IRS uses a 20-factor test to determine if an individual is a independent contractor.  If you are currently working independently, how do you fit into the following standards?

 

1.  Must comply with employer's instructions about the work.

2.  Receive training from or at the direction of the employer.

3.  Provide services that are integrated into the business.

4.  Provide services that must be rendered personally.

5. Hire supervise, and pay assistants for the employer.

6. Have a continuing working relationship with the employer.

7. Must follow set hours of work.

8. Work full-time for an employer.

9. Must do work on the employer's premises.

10. Must do their working in a sequence set by the employer.

11.  Must submit regular reports to the employer.

12. Receive payments of regular amounts at set intervals.

13.  Receive payments for business and/or traveling expenses.

14.  Rely on the employer to furnish tools and material.

15.  Lack of a major investment in facilities used to perform the service.

16.  Cannot make a profit or suffer a loss from the services.

17.  Work for one employer at a time.

18.  Do not offer their services to the general public.

19. Can be fired by the employer.

20.  May quit work at anytime without incurring liability.

 

      If the individual has control over the performance of the work and the hours worked and he is motivated by profit, he is more likely to be classified as an independent contractor.

 

      The following are points to consider in preparing an independent-contractor contract in order to protect your self as much as possible from the IRS allegation of employee status.

 

1.  Specify the services provided.

2.  List a starting and completing date.

3.  Be sure that the contractor controls the methods of completing the contract.  He, for example, could hire other employees to help him with the job.

4.  The contract should clearly show that the contractor is in charge of supervising the work and deciding how it will be performed.

5.  Agree that the contractor will provide all the insurance.

6.  Payments should be varied and sporadic.

7.  Do not separately provide for expenses; that should be included in the contract.

8.  Training of workers is the responsibility of the contractor.

9.  Do not include office space for the contractor in the agreement.

10.  Don't pay bonuses.

11.  Agree that if work slows down, the contractor will not have other work to do.

12.  Make it clear that if the contractor quits his job he is at risk of a lawsuit for not finishing his contract.

13.  If the independent contractor is incorporated, there is no requirement that the taxes paid to the corporation be reported to the IRS.

      The moral of the story is that you should be very careful if you are operating as an independent contractor.  The IRS will do its best to reclassify you as an employee.

 

THE CONGRESSIONAL RESEARCH SERVICE

 

 

            Many of you have probably received form letters from the IRS in response to your letters to Congress or you have received copies of the Congressional Research Service documents that purportedly answer questions.  If so, you have received examples of some of the most masterful doublespeak in the English Language.

 

            For example, one letter states that the Internal Revenue Code requires paying taxes and then quotes six sections of the Internal Revenue Code.  They are Sections 6072, 6091, 6151, 6155, 6651 and 6663.  I dare you, look those sections up.  Not one of those sections makes anyone liable for a tax or requires the payment of tax.  Furthermore, not one of those statutes even requires the filing of a return.  Isn't it amazing what the IRS can get away with?

 

            The document goes on to state that the "requirement to file an income tax return is primarily designed to facilitate revenue collection, not criminal prosecutions.  Therefore, a taxpayer may not rely on the Fifth Amendment privilege..."

 

            Now, give me a break!  I wasn't born yesterday.  What does that mean?  They can obviously still use the information criminally even if they don't generally do it.  The document further states: "However, the Fifth Amendment does not apply unless the government is seeking testimony that will subject the provider of the testimony to criminal liability."  Are we supposed to assume from that statement that we are required to give the government information they can use against us or that we are not required to give the government information that it can use against us?

 

            The CRS Bulletin states that: "We do not have a voluntary tax system in the sense that payment of taxes is optional. There are specific provisions of law which require the payment of income taxes."

 

            Interestingly enough, the Bulletin does not state what those Code Sections are that require the payment of income taxes; and furthermore, what does voluntary mean if it does not mean optional. Does it mean the opposite of optional is non-optional which is required?  Who is kidding who?

 

 

            The CRS Bulletin further goes on to state:

 

                 The Federal income tax is imposed, in IRC Section 1, on the taxable income of every individual.  Taxable income is defined in IRC.  Section 63.  Every individual whose gross income exceeds specified amounts is required to file an income tax return under IRC Section 6012. Gross income is defined in IRC Section 61.  When a return is required by the IRS, the person required to make such return is required without assessment or notice and demand of the Secretary, to pay such tax to the internal revenue officer with whom the return is filed under IRC Section 6151.  These sections, working together, make an individual liable for income taxes.

 

            Well, assuming that Section 6012 does require individuals to file returns, does it require them to waive their Fifth Amendment Rights?  If not, then can the IRS use the information on 1040 returns in criminal tax cases?

 

            How do the sections, working together, make individuals liable for the tax?  The answer is that they don't. Individuals become liable by voluntarily filing returns and voluntarily waiving their Fifth Amendment Rights and making a self-assessment.  Alternatively, the government can make the assessment for them.

 

            Check out the definition of Gross Income in Section 61(a)  Do you have a copy of my opinion letter on that Section?  What do you think of my analysis? 

 

 

            The CRS Bulletin goes on to stay that the IRS' Audit procedures don't violate the Fourth Amendment.  That is true because attending audits is voluntary.  But they don't tell you that.

 

            Anyway, the CRS Bulletin and the letters prepared by the IRS for congress people are masterpieces of doublespeak. They do their very best to convince us that something is true that is not. And, since most people believe them, they are quite effective.  I am glad you aren't a true believer, as true believers don't read this publication.

 

 

Some Very Nasty Bankruptcy Law

 

      In the past ten years, individuals across the country have bankrupted millions of dollars in back taxes.  Of course the situation is very distressing to the IRS because, contrary to popular belief, the Bankruptcy Code does allow the bankrupting of taxes providing that special rules are met.  Obviously some judges are interested in making it more difficult for debtors to discharge taxes and they have begun to interpret statutes to say things that they do not say.  In the case of Mickens v. United States, 1997 WL 729062 (N.D.Ohio), the court created a situation in which the debtor cannot file a return for purposes of the two year rule if the government files a return first.  This terrible state of affairs will effectively bar many individuals who have not filed returns from a Chapter 7 Bankruptcy.  This interpretation of the law is a new and novel interpretation that extends the meaning of the statute. 

 

      The court found that the debtor's failure to file a return before the IRS properly assessed the tax liability rendered his tax liability non-dischargeable for failure to file a return.  The court took the position that the return filed by the debtor did no constitute a return.  In order to constitute a "tax return" for purposes of dischargeabiity under 11 U.S.C. Section 523(a)(1)(B)(i), a document must: (1) purport to be a return;(2) be sworn to as such under the penalties of perjury; (3) contain sufficient data to allow calculation of the tax; and (4) appear on its face to constitute an honest and genuine endeavor to satisfy the law. See Germantown Trust Co. v. Comm'r, 309 U.S. 304, 60 S. Ct. 566, 84 L.Ed. 770 (1940); Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 55 S.Ct. 127, 79 L.Ed 264 (1934); In rehindenlang, 205 B.R. 874 (Bankr.S.D.Ohio 1997). The parties agreed that the returns purport to be returns, are sworn to as such and contain sufficient data to allow calculation of the tax.  The dispute is whether the form appear to constitute an honest attempt to satisfy the law.

 

      The court's ruling in this case is really horrible foray individual who does not file a return pre assessment. 

 

      "The Court agrees with the Government.  Section 523 (a) (1) (B) (1) was meant to encourage honest and self-generated reporting taxpayers, not to immunize non-reporting debtors who, one caught, seek to discharge their discovered tax obligations along with other debts in bankruptcy."  In re Haywood, 62 B.T. 482, 486 (Bankr.N.D.Ill. 1986).  Courts in determining whether a given document constitutes a tax return typically place great weight on the taxpayer's cooperation in the auditing process, consent to immediate assessment, and assistance in the preparation of the assessment.  See. Matter of Berard, 181 B.R. 653, 657 (Bankr.M.D.Fla. 1995).  No such cooperation appears in the record of this case; indeed, the record indicates instead that the debtor is a non-reporting debtor who, now that he has been caught seeks,  to discharge his discovered tax obligations along with other debts in bankruptcy.   

Common Law Trusts

 

      Various individuals around country are selling "common law trusts," or "pure trusts."  They are making the claims that these trusts are exempt from payment of income taxes and that they don't have to file tax returns.  They are selling the trusts for tens of thousands of dollars to small businessmen.  They take the position that since the funds are paid to this special type of trust that no tax is owed. 

 

      Unfortunately, they are incorrect.  There is no statutory or case law that stands for the proposition that a common law or pure trust has some sort of special exemption under the tax laws and furthermore, they have a problem with the assignment of income.  The courts take the position that income is taxable to the person who earns it.  United States v. Bayse, 410 U.S. 441; Commissioner v. Culbertson, 337 U.S. 733.  That means that if an individual sets up a trust to take the income for him, the courts may rule that it is still his income because the power to dispose of income is considered equivalent to its ownership.  See Helvering v. Horst, 311 U.S. 112.  Justice Holmes in Lucas v. Earl, 281 U.S. at 114-115 stated:

 

"There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillful devised to prevent the salary when paid from vesting even for a second in the man who earned.  That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew." 

 

      Many of the individuals who have purchased these magic pure trust documents will find that the courts rule against them by taking the position that the shifting of the tax liability to a paper entity runs afoul of the well-settled principal that "income must be taxed to him who earns it."  Commissioner v. Culbertson, 337 U.S. at 739.  In the case of Vanuk v. Commissioner, 621 F.2d 1318 (8th Cir. 1980), a physician engaged in the practice of radiology, created at trust to which he conveyed "the exclusive use of my lifetime services and all the currently earned remuneration accruing therefrom.  Id. at 1319.  The Eighth Circuit concluded that the taxpayer and not the trust, was taxable on the income accruing from radiological services, reasoned as follows (id. at 1320.)

 

      "Where the taxpayer simply assigns his lifetime services and income earned from the performance of those services, and the taxpayer rather than the trust has the ultimate direction and control over the earning of the compensation, the conveyance is ineffective to shift the tax burden from the taxpayer to the trust."

 

      The court concluded that that ultimate direction and control over the earning of compensation rested with the taxpayer.  The trust had no right to supervise the taxpayer's employment or to determine his compensation. Other cases that have agreed with this position are:  Hanson v Commissioner, 696 F2d 1232; Schulz v. Commissioner, 686 F2d 490: Wesenberg v. Commissioner, 69 T.C. 1005 (1978).  If the taxpayer has control over the money in the trust he has been required to include the money in his gross income.  See Commissioner v. Glenshaw Glass Co. 348 U.S. 486 and Chu v. Commissioner, 72 T.C.M. (CCH) 1519 (1996).

 

      The moral of the story is that you must be very careful about the purchase of common law trusts as a magic way to avoid taxes.  The government under current case law has avenues of attack and the tax court is not going to take the position that a common law or pure trust does not have to pay taxes on income. 

 

 

      The three year period is tolled during any period in which an extension to file was in effect. (11 U.S.C. 507(a)(8)(A)(i), In re Gidley, 138 B.R. 298 (M.D.Fla. 1992), or during the time any other bankruptcy case was pending or the period of time that a taxpayer assistance order is in effect.  Courts have also held that the three-year period is tolled during the time the debtor was in bankruptcy, plus an additional six months.  See Matter of Ross, 130 B.R. 312 (Neb. 1991); In re Worthen, 137 B.R. 1016 (DC Ore. 1992); In re West, 137 B.R. 1012 (D.Or. 1992); In re Wise, 127 B.R. 20 (E.D.Ark. 1991). 

 

      The two year rule has also been hold to be tolled during the time a bankruptcy is pending See Matter of Stoll, 132 B.R. 782 (N.D.Ga. 1990.

 

      The 240-day period for assessment is tolled during any time that the debtor has a case pending in tax court plus it is tolled during any period the individual is in bankruptcy court plus six months.  It is also tolled by an offer in compromise.  The OC tolls the running of the 240-day assessment period plus 30 days.  See 11 U.S.C. Section 597 (a)(8)(A)(ii).  The 240 day period is also tolled by any time that the debtor was in a bankruptcy within the 240 day period plus 60 days for the assessment period or six months for the collection period.  See In re Brickley, 70 B.R. 113 (9th Cir. 1986); In re Moina, 99 B.R. 792 (Ohio, 1988)

Some Bankruptcy Cases

 

      If the IRS claims that you owe back taxes, you should pay special attention to this article.  Bankruptcy may prove to be a very effective way for you to escape the debt.  The rules regarding the bankruptcy of taxes are complex and the case law seems to make them more complex every day. 

 

      In the case of In re Carolinch Co. 210 B.R. 518 (Bkrtcy.E.D.Pa. 1997), the court ruled that a tax lien must be filed or recorded to be valid, and rule of "first in time first in right" applies in determining the validity of a senior creditor versus a junior IRS lien.

 

      In the case of In re Dixon 210 B. R. 610 (Bkrtcy. W.D. Okl. 1977), the court ruled that a Chapter 13 debtor's 1992 income tax liability which was payable before the bankruptcy case was prepetition debt.  Since the IRS failed to file a proof of claim for the prepetition debt, the plan resulted in a discharge in favor of the debtor.

 

      Payments made to the IRS in a confirmed Chapter 13 plan were "vested" with the IRS and could not be returned to the debtor after conversion to a Chapter 7.  In re
Verdunn, 210 B.R. 621 (Bkrtcy M.D. Fla 1997)

 

      The court determined in the case of In re Sommers, 209 B. R. 471 (Bkrtcy N.D. Ill. 1997) that the debtor willfully evaded taxes by transferring his assets to domestic and off-shore entities.

 

      A tax protestor who filed a Chapter 13 failed to overcome the prima facie assumption of correctness of the IRS' claim.  In re Myrland, 209 B.R. 524 (Bkrtcy.W.D.Wash. 1997)

 

      A taxpayer filed an extension for a due date of federal tax returns and the court determined that his taxes were priority status.  See In re Bishop, 209 B.R. 578 (Bkrtcy N.D.Ga. 1997).

 

      The court in In re Weiss, 209 B.R. 571 (S.D.Fla. 1996), determined that the IRS' refusal to accept the debtor's tax returns showing the correct amount of tax was arbitrary.

 

      A Chapter 7 debtor was determined to have willfully attempted to evade taxes when he transferred assets to a live-in companion without consideration.  The court determined that the willful attempt to evade tax may include any effort to mislead or conceal.  See In re Griffith, 210 B.R. 216 (S.D.Fla. 1997).

 

      A Chapter 7 debtor's intentional failure to file tax returns and his failure to pay taxes when he could afford to pay was sufficient to prove that the debtor intended to evade or defeat his tax liabilities for dischargeability purposes.  See In re Fedeley, 118 F.3d 979 (3rd Cir. 1997).

 

      The IRS was found liable for all damages including attorney's fees and bank service charges when it violated the automatic stay.  In re Fedeley, 118 F3d 979 (3rd Cir. 1997).

 

      The state did not have to produce registered mail receipts to prove that taxes were properly assessed.  Matter of Humble, 209 B.R. 54 (Bkrtcy.E.D.La.1977).

 

      The tax lien survives the discharge as to the property owned by the debtor at the time of the bankruptcy.  Matter of McCorkle, 209 B.R. 773 (Bkrtcy.M.D.Ga. 1977).

 

      This issue is very important so pay close attention.  The court determined that a prior bankruptcy tolls the running of tax discharge periods, but the taxing entity is not entitled to an additional six months of tolling time.  See In re Rangel, 209 B.R. 745 (Bkrtcy.D.Kan. 1977).  Citing In re Richards, 994 F.d 763 (10th Cir.1993). Note also that a prior bankruptcy tolls the running of the three-year priority period.  See In re Zecco, 221 B.R. 109 (Bkrtcy.D.Mass 1997). Also see Montoya v. United States (In re Montoya), 965 F.2d 554 (7th Cir. 1992); Waugh v. Internal Revenue Service (In re Waugh); 109 F.3d 489 (8th Cir. 1997).

 

      The issue of the filing of the return is extremely important.  In the case of In re Huber, 211 B.R. 767 (Bkrtcy.M.D.Fla., 1977, a Chapter 7 debtor could not discharge his tax because he failed to show by a preponderance of the evidence that the tax return was filed; the only evidence acceptable in the Eleventh Circuit is either a postmark on the envelope or a registered or certified mail receipt; the debtor's testimony and a production of a copy of the return were insufficient.  In re Huber, 211 B.R. 767 (Bkrtcy.M.D.Fla. 1997).

 

      The taxpayer bears the ultimate burden of proof with regard to the validity of a tax claim asserted in the context of a bankruptcy proceeding.  See Thinking Machines Corp. v. New Mexico Taxation and Revenue, 211 B.R. 426 D.Mass. 1977).

 

 

COMMMUNITY PROPERTY STATES AND THE FREEDOM MOVEMENT

 

 

 

Various states such as Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas and Washington follow a community property system.  Under community property law, all property acquired by the husband and wife during marriage and while living together, whether by gift or productive work of either the husband or the wife is community property.  In community property states, the IRS routinely attacks the spouse of an individual who has not filed.  For example, if a man in the state of California receives an assessment for $40,000 in back taxes for the year 1985 (a year in which he did not file a return), his wife (who is a housewife) will receive an assessment of $20,000 which is 50% of the amount the husband allegedly owes.  Now just imagine the hardship that can be created for you if you are involved in the Freedom Movement and you happen to live in a community property state.

 

Currently, various individuals are litigating the IRS' right to proceed in this fashion, but the smart individual will do something to protect himself.  Marriage simply may not be a safe arrangement for individuals who insist in living in community property states.

 

However, if you are married and you insist on staying that way and you also insist on remaining in the front lines of the Freedom Movement, you should at least consider the creation of a community property agreement that earnings remain separate property.  Such an agreement could read as follows:

 

     "1.  Parties.......(husband) and.........(wife) were married on .........,19..., in .........(place of marriage).  As of the date of this Agreement, they are living together as husband and wife.

 

      2. Property.  the parties agree that their respective earnings from any employment in which they may engage during the course of their marriage will remain the exclusive property of the person who earned it, and shall not become community property.

 

.........., 19........

 

                              ............................

                              (Signature of the Parties)   "

 

If such an agreement is signed, the IRS should be notified of such an agreement as the first audit contact.  Later, should the spouse be attacked, an unlawful levy suit could be filed in the District Court, or a Tax Court Petition could allege that the wages were separate property.  If you wish to use this approach, it would be advised for you to go to the law library in your state and check on the law regarding this procedure. You may wish to have a local attorney draft such a contract.

 

No matter which approach you take, remember that the best approach is one that gives you the needed level of comfort and makes the statement you wish to make.  Don't put yourself out on a limb without a parachute.

SOME THOUGHTS ON COMMUNITY PROPERTY LAWS AND THE IRS

 

 

            Many individuals who have run head-on into a confrontation with the IRS have been surprised by the fact that the IRS treats married couples differently in community property states than in the other states.  The community property states are:  Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin (Under the provisions of the Wisconsin Marital Reform Act, the rights of spouses in Wisconsin are community property rights).

 

            Generally, in community property states, property which is purchased with community funds is community property and the income from that property is community income.  Property, which is purchased with separate funds after marriage, is separate property.  The income from separate property is taxable solely to the spouse owning the property in states where that income does not constitute community income.

 

            Generally, community income is income from community property, salaries, wages and other pay for services of either spouse or both the husband and wife during the marriage.  Community income also includes the earnings of unemancipated minor children. (Apparently your minor child could owe taxes on your liability in a community property state if that minor child had wages).

 

            Now get this twist: Income from separate property is income of the partner who owns the property in Arizona, California, Nevada, New Mexico and Washington; but, in Idaho, Louisiana, Texas and Wisconsin income from separate property is community income.

 

            It is generally assumed that property obtained after the marriage is community property whether it is in the name of the husband, the wife or both.

 

            If you are in a community property state, and you are married, and you choose to file separate returns; then each spouse must report one-half of their combined community income and deductions in addition to their separate income and deduction.  You can see, obviously, how dangerous it is to be married in a community property state if you are fighting the IRS.  If husband and wife can remain judgment proof and they both are in agreement with the stand against the IRS; then they are OK; but what if judgment proofing is impossible and what if the wife doesn't approve?  Then the wife, when she files, must declare half the husband's income. The IRS can then use the information on her return to attack her husband both criminally and civilly.

 

            Therefore, if you are in a community property state and you are fighting the IRS, you really have three choices:

 

            1.  Both spouses are on the front line.

     2.  Divorce and live together, then one spouse files as single; the other spouse stays on the front line.

     3.  Stay married and construct a written agreement in accordance with the laws of your state.

 

            Agreements, which change the characterization of property ownership, may be enforced; but they must be written.  In some states oral contracts have been accepted, but I wouldn't recommend that you take that chance.  If the wife of the "taxpayer" relinquishes her rights to any property which the taxpayer then had or might thereafter acquire, then the salary earned or received by the taxpayer after the execution of such agreement was taxable in its entirety to him, because it was his separate property. (Van Dyke v. Comm., 120 F.2d 945 (CCA9, 1941); Ruben v. Comm., BTA Memo Op Dkt 104037 (1942), both of these decisions involve California Law.

 

            You must have a clear cut agreement on the ownership of property. (Helvering v. Hickman, 70 F2d 985 (CCA9, 1934) and Brooks v. Comm., 43 BTA 860. Wehe v. McLaughlin, 30 F2d 217 (CCA9, 1929); Sherman v. Comm., 76 F2d 810 (CCA9, 1935).  If your case ends up in the Tax Court,  your situation will be closely scrutinized.  (Woodhall v. Comm., 38 BTA 97, affd. 105 F2d 474 (CCA9, 1939).

 

            Anyway, hang in there and be sure to cover yourself if you are in a community property state.

The Limited Liability Company

 

      The Limited Liability Company has become one of the most popular forms of business organization.  The advantages of a limited liability company are the following: Double taxation can be avoided; personal liability is limited as in corporate organization; there is much less paperwork than in corporate organization; it is easier to form a limited liability company; it is easy to convert a current business to an LLC; it is inexpensive to establish and maintain an LLC.

 

      LLCs must conform to the Uniform Limited Liability Act of 1995.  The most important points in the ULLA are the following: The LLC must have an identity different from its members, it may be organized for profit or non-profit, some states allow an LLC to have one member, and some states require that the LLC have at least two members.  Members of the LLC have limited liability, etc.

 

      The LLC can also help to protect assets.  One idea is to owe the LLC money.  The LLC can then accept a mortgage on your home and personal property.  If you later have personal credit problems, the mortgage that you owe your LLC can protect your assets from the IRS or other creditors. You can also transfer assets to different LLCs instead of transferring all the assets to one LLC.  The more entities you have to own assets, the harder it will be for the IRS or other creditor to attach assets.  An LLC can also be set up in combination with a foreign trust system.  It is necessary to make property transfers to the LLCs far in advance of anticipated liability problems to avoid fraudulent transfer assertions. 

 

      LLCs make good entities for the transfer of real estate and other investments to other individuals.  Once an LLC owns the property, an LLC membership interest can be gifted instead of gifting the actual property.  The LLC is more flexible than a trust arrangement for the purpose of gifting assets.  It is more flexible than a trust and there are no limitations to the number of members or mandatory income distributions. 

 

      In summary, an LLC has benefits of both a corporation and a limited partnership.  It may have tax benefits or disadvantages depending on the situation.  It can be organized in another state.  Managers and members of the LLC do not have personal liability for the debts of the LLC.  A creditor of a member in an LLC can generally obtain only a charging order against that member's interest and the creditor can only get distributed profits but the creditor becomes liable for the taxes that are attributable to the member's share of the profits.  The LLC can function as a business or it can hold assets and passive investments.

 

Bankruptcy and the IRS Lien

 

            If you have a retirement fund that the IRS cannot take from you in bankruptcy court, it is still possible that the IRS will attempt to claim that the taxes are secured by their lien on your exempt asset.  Although, the IRS' lien may survive bankruptcy as to the value of the exempt asset, the IRS should not be allowed to secure the tax that is otherwise dischargeable.  Be sure to fight back hard if the IRS argues that an exempt asset secures your taxes. 

 

            Although IRS levy powers typically include the right to levy on various categories of retirement and pension plans, as a general rule IRS Collection activity policies discourage levy on social security, veteran's pension plans, benefits under the GI Bill of Rights, disability benefits, and similar income.

 

            The IRS ordinarily may not levy on the corpus of a pension fund if the employee does not have the right to access the funds in a lump sum.  (IRM 536(14.5)(1).  And a levy may not attach to ERISA pension payments until a taxpayer has a right to receive such payments:

 

            For a levy to attach funds in a pension or retirement plan, the taxpayer must have an unqualified, unconditional right to demand payment from the plan.  The levy only attaches the taxpayer's present right.  If the taxpayer's only present right in the plan is a right to receive payments in the future, the Service is not presently entitled  to receive any amounts for the levy. (Rev. Rul 55-210 (1955-1).  The IRS' interest in a lien on exempt property is protected even if otherwise dischargeable taxes are determined to be discharged by the Court. See In re Frengel, BR 115 569 and In re Zouhar, 10 BR 154.  The Court does not have to declare the tax is undischargeable to protect the government's interest.

 

Jury Nullification

 

            The right of "jury nullification" goes back to Britain in the eighteenth-century when jurors, in spite of the fact that they were fined and jailed, refused to convict two Englishmen for speaking to a street crowd.  There is a plaque in the Old Bailey courthouse in London which attests to the courage of the jurors and the final opinion of the high court which "established the right of Juries to give their Verdict according to their conviction."

 

            In the United States, the principal of jury nullification was affirmed in 1735,   when John Zengler, a New York printer, was acquitted by a jury of seditious libel.  The jury ignored the judge's instructions. 

 

            In the nineteenth century, the courts began to rule that the juries did not have the right to decide the law; they could only decide the facts and they had to follow the judge's instructions.  However the matter was not settled, because juries can vote their consciences no matter what the judge says the law is.  Wigmore, a famous legal scholar wrote in 1929:

 

"Law and Justice are  from time to time, inevitably in conflict.   That is because law is a general rule;...The jury, in the privacy of its retirement, adjusts the general rule of law to the justice of a particular case...The jury, and the secrecy of the jury room, are indispensable elements in popular justice."

 

Roscoe Pound, another famous legal scholar, had previously stated in 1910, that "jury lawlessness is the great corrective in legal proceedings."

 

More recently, the Circuit Court of Appeals, while affirming convictions of the Catonsville Nine draft board evaders, made the following perceptive statement:

 

"We recognize...the undisputed power of the jury to acquit, even if its verdict is contrary to the law as given by the judge and contrary to the evidence...If the jury feels that the law under which the defendant is accused is unjust, or that exigent circumstances justified the actions of the accused, or for any reason which appeals to their logic or passion, the jury has the power to acquit and the courts must abide by that decision."

 

            Unfortunately, the Courts do not explain to the jurors that they have the right to nullify the law.  Jurors must come to an understanding of this fact before they are called to jury duty.  Dr. Spock and others were tried during the Vietnam war for their anti-government activity. One of the jurors wrote to the Boston Globe about his depression regarding the verdict.  He did not know about jury nullification. He said:

 

"How and why did I find four men guilty?  All men of courage and individuals whom I grew to admire as the trial developed...As the father of three teen-aged sons, two eligible for the draft, and a veteran myself, my abhorrence of war is understandable...Was I ready to commit my sons?...Rev. Coffin's thought provoking argument struck home--"Isn't the Cross higher than the flag?  Must we not obey God before we obey man?..."The paradox was that I agreed wholeheartedly with these defendants, but...I felt that technically they did break the law...I departed to the waiting car and then to home.  There I was embraced by my loved ones and I began to think and try to explain...These four men were trying to save my sons whom I love dearly, yet I found them guilty.  To hell with my ulcer.  After four or five stiff hookers (I lost count) I began to cry bitterly."

 

            So, as you can see, the jury nullification issue is very important.  As a juror, you can disregard the judge's instructions and vote based on your conscience.

 

HOW TO DEAL WITH A REVENUE OFFICER

 

            Today I went with a friend of mine to the IRS to speak with a Revenue Officer.  As you know, Revenue Agents are the people who audit tax returns and Revenue Officers are the individuals who collect the money. My friend had received a notice of levy because he allegedly owed the IRS a lot of money.  He had filed an Exempt W-4 during 1984 and has been on one ever since.  He had not filed 1040 tax returns since 1984.  Several years ago, my friend lost a great job because he put exempt on a W-4.  

 

            Anyway, the IRS was about to levy his wages down to $75.00 and he was feeling really blue.  We went into the collection division and within two hours we worked out a payment plan of $100.00 a month on an alleged liability of $100,000.00. 

 

            We decided that it is much better to give the IRS some paper than to let them take the money.  Quite frankly, there are many patriots that are living on $75.00 a week when they could go into collections and solve the problem.

 

            We sat down with the revenue officer and showed him that my friend had about $100 a month to spare.  We filled out a 433A collection Statement and prepared the tax returns.  When the IRS asked us to prepare the returns we informed them that we would be happy to provide them with deductions but they had to fill out the returns because we didn't know how to do it.  They complied and the returns were prepared. Since all returns were filed and no fraud was involved; my friend will pay $100.00 a month for two years and then he will file a Chapter 7 Bankruptcy.  His problems are solved. (Warning, the IRS might raise the issue in Bankruptcy Court that a W-4 exempt prevents discharge because it is a fraudulent form, please do not file exempt W-4 Forms.

 

            Now the question remains. How can he fight the IRS in the future? He must wait until he is out of trouble. For now, he must voluntarily file returns. However for future years, he can obtain opinion letters showing that he is not required to file.  Since his employer is sending money to the IRS, and the IRS has the money, they will have difficulty proceeding against him either criminally or civilly.  Since he did not self-assess, the IRS must assess him.  At the end of the year he may choose to file a claim for a refund for the funds sent by the employer to the IRS.  He may choose not to file a tax return as he has been advised by counsel that he is not required to file.  The IRS will have possession of his money without an assessment in place.  Six months after the filing of the claim for the refund, he may file a refund lawsuit. (See Chapter RL in the IRS Technical Manual).  His argument may be that there has not been a proper assessment.  Now as you can see, if my friend chooses this course of action, he will be taking a front-line position that will be a safe one.  He will be on the offensive and he will have the opportunity to win.  At the very least, the IRS will spend more money  fighting my friend than he will have paid in taxes; and he will be protecting his wages, staying out of jail, and making a significant contribution to the Freedom Movement all at the same time.  (Warning:  Never file a zero return, there are huge penalties in place for filing zero returns.)

The secret of my friend's success in the collection division is that he is judgment proof except for wages.  He has no bank accounts, he has no real estate, he just has wages; and the collection division realized that it was better to play ball with my friend than to harass him.

 

            If you have a job, you are not judgment proof.  Don't let the IRS take your wages; you can stop that levy.  Then fight back.  Learn to fight smart.  You cannot put exempt on a W -4 and keep the IRS from collecting against you unless you are willing to either capitulate and make payments toward the alleged liability when collections attacks you or unless you are willing to quit your job and work underground.  Those patriots that are sitting still and letting the IRS take all their funds in a levy are simply feeding the malicious beast.  Please learn to fight back.  Don't be a victim: be a winner.