TAXES? WHAT TACTICS CAN HELP V. THE IRS?

 A summary of Thurston Bell's thesis by We The People

Foundation for Constitutional Education.

 Thurston Bell noted that the information and views he presents would not have been developed without the inspiration and motivation of members of past and present organizations that he's worked with, most importantly the National Institute for Taxation Education, and that it was the story of Mr. Bill Benson's incarceration and medical mistreatment, as well as the story of Gordon Kahl's demise which got him involved in this issue and this movement.

Bell's method emphasizes and recommends meeting the IRS on the field of battle along the battle lines drawn out by the Congress in terms of the laws that have been passed and our constitutional right to due process. His method focuses on evidence, rules of evidence, administrative procedures, and due process, all of which are of paramount importance as a practical matter independent of statutory issues of trying to solve the puzzle of who is liable and what is gross income. Bell deals here with the statutory issues first and then with procedural, administrative matters.

CONNECTING THE DOTS: THE STATUTORY PATH LEADING TO THE CONCLUSION THAT MOST CITIZENS ARE NOT LIABLE FOR THE INCOME TAX

Bell's work has led him to a position which recognizes that there is a federal law that imposes a requirement upon some citizens and foreigners to file and pay an income tax - but the big question is, of course, to what proportion of citizens does the requirement apply? Does it apply to most citizens, or just to a small, specifically-defined subset of citizens? To answer this, we must follow a trail of statutes and regulations to see where they lead. It is a difficult trail to follow; it is easy to take a wrong path; and there have been few directions or signposts supplied by the IRS.

[Bell does not deal with the 16th amendment question and the constitutional problem of a direct tax without apportionment or the view that the income tax is in the nature of an indirect excise tax, which, of course does not have to be apportioned. His approach is not dependent on the resolution of those questions one way or the other, as it avoids them altogether. Ed.]

The statutory trail starts with 26 USC Section 1, which imposes the income tax on "taxable income," and with Sections 6001, 6011 and 6012, which the IRS uses as the all-encompassing filing-requirement statutes. Section 6001 says: "Every person liable for any tax imposed under this title...shall keep such records..make such returns...and comply with such rules and regulations as the Secretary may prescribe." [Secretary refers to the Secretary of the Treasury or, more realistically, to the IRS Commissioner]. Section 6011 says: "When required by regulations...any person made liable by any tax imposed by this title...shall make a return." Section 6012 says: "Returns...shall be made by...[e]very individual having...gross income which exceeds the exemption amount.…"

Now we take the trail to find out what "taxable income" and "gross income" are. 63 says that the term "taxable income" means "gross income minus the deductions allowed by this chapter..." So the definition mainly depends on the definition of "gross income." We then see in 61 that "gross income" is income from "whatever source," and we see a list of 15 items which we take to be the sources and that we have been led to believe we must pay taxes on, such as: compensation for services, fees, commissions, benefits, gross income from business, interest, rent, dividends, gains from property dealings, etc. It is crucial to be aware, however, that the term "item" does not mean the same as "source." Therefore, the list does not identify any sources upon which we must pay a tax. This is most deceptive.

Another stop on the trail towards finding out what gross income is and the sources of it that can make one liable is at 861, which lists "items" of gross income which are to be treated as income from sources within the U.S. There is no other part of the Internal Revenue Code that deals with tax based on income from sources within the U.S. (We can assure ourselves of this by using a computer search engine to look through the code.) Therefore, all else not on the list must be excluded as being outside the purview of the law.

If one wonders how, given the wording of 861, one can avoid equating "items" and "sources," take note that 861 is a statute and that the IRS is bound by the regulations promulgated by the Secretary (or Commissioner), which actually implement the statutes. The pertinent regulation is CFR 1.861-8(f)(1), which contains the only list of "sources," from within or without the U.S, from which income must derive in order to be taxable. The list consists of: overall limitation to the foreign tax credit, DISC (Direct Internat'l Sales Corp) and FSC (Foreign Sales Corp.) taxable income, non-resident alien individuals and foreign corporations engaged in business within the U.S., foreign base company income, and other operative sections (the list of which consists of 13 sources outside the U.S.).

Note well that one source in the list under "other operative sections" applies to U.S. citizens, albeit only to citizens who are entitled to the benefits of 931 and 936 tax credit (which pertain to Guam and Puerto Rico). This inclusion of a group of U.S. citizens here is very important, because it must therefore include all citizens with taxable sources of income from within or without the U.S. In other words, if there were any other citizens whose sources of income were taxable, they'd have to be included on this list, and there are no others listed.

As you can see, none of this liability applies to the vast majority of citizens, who have been misled into believing they must file and pay income taxes on the "items" of income noted in 61, above. Instead, it applies to U.S citizens only insofar as they have foreign earned income. The tax also applies to aliens and foreign companies doing business in the United States. In fact, Bell says that only a few years ago, the Secretary acknowledged that Form 2555 was the form most frequently required to be filed by citizens under 1, and only if they had foreign income as noted above.

Bell points out that the IRS does not have authority to make determinations of "gross income;" it only has authority to make determinations of "taxable income." In his experience, IRS claims, whether criminal or civil, against citizens are almost always based on the issue of gross income.

Now let's go back and reread 6001, 6011, and 6012. We can see now who these sections are talking about when they refer, respectively, to "Every person liable," "any person made liable," or "every individual having...gross income..." We can see that the government, by means of such a circuitous and disconnected trail of rules and regulations, has made it extremely difficult for most ordinary people to figure out that they are not liable for the income tax. We can see that the government is duping most people into voluntarily filing returns, assessing themselves, waiving their 5th amendment rights, and erroneously paying an income tax for which they are not liable. By comparison, the statutes and regulations for excise taxes are straight-forward, clear, and unambiguous, proving that the Congress and IRS are capable of making the rules simple and easy to understand if they want to. This trickery and deception serves a function of avoiding violations of the constitution which would be more transparent otherwise. But beyond the deception there is also the practice of illegal misapplication of the laws and regulations and denial of due process, which we will look at in a few minutes, after discussing a couple of other aspects of tax liability.

First, let's look at the withholding aspect of tax liability to see whether it reinforces or adds anything further to our understanding of tax liability or what kind of income is taxable. If withholding is applied properly, it should reveal what is taxable. Will our examination of withholding yield results consistent with the conclusions drawn above?

26 USC 3401(a)(8)(A)(1) defines "wages" for purposes of withholding as all remuneration for services performed by an employee for his employer; except that such term shall not include remuneration paid for services for an employer performed by a citizen of the U.S. if it is reasonable to believe that such remuneration will be excluded from gross income under 911. And pursuant to CFR 1.861-8(T)(d)(2)(ii)(A), all income that is excluded or not listed is exempt. So the only sources of income U.S. citizens earn that is "gross income," and thus taxable and subject to withholding, are found under 911, which relates to U.S. citizens living abroad or foreign earned income, the same conclusion we came to above. So withholding law, properly applied, reinforces our earlier conclusion. It is apparent that employers are being duped into submitting false information about most employees, withholding their money, making it appear they are liable, and thereby putting them on the defensive, since they must then dispute that their wages are taxable.

Next, if we look at the laws regarding liability for the Social Security tax, we will find that they derive from the International Labor Agreement of the 1930s, and that once again, they do not apply to most U.S. citizens, but to aliens and to some citizens based on foreign income or income from U.S. overseas possessions.

So, three sets of statutes and regulations all lead to the "foreign liability" conclusion, not to liability by most citizens.

DUE PROCESS AND ADMINISTRATIVE PROCEDURES

If you are persuaded that you are among the vast majority of citizens who are not liable for the income tax, you will wonder what to do about it. Based on his experience of helping NITE members in their struggles with the IRS, Bell believe that it will be difficult to bring the issues described above directly before the judiciary, largely because the IRS has a number of tactics they use to prevent those issues from getting that far. He estimates that it will be perhaps three years before that is likely to happen. Currently, the real battlefield, the most immediate one for most people at odds with the IRS, is in the administrative procedures that the IRS uses, or is supposed to use, before the courts become involved. And to fight the battles in this arena one needs to be schooled in principles of due process, because the IRS will do all it can to ignore your due process rights and prevent you from exercising them. If you do not understand those rights, you will not be able to put up much of a fight.

You must also familiarize yourself with the IRS's administrative process, an administrative paper shuffle designed to leave you in a position of speaking without being heard. The landmark US Supreme Court case of Goldberg v. Kelly proved and demonstrated some of the administrative due process rights that we are entitled to use. Opening arguments of the case were aired on CSPAN Radio 90 out of Washington. (This case is highlighted in an article titled "Gold Bullet" at Taxgate.com.)

Rudimentary components of our administrative due process rights include the right to make contentions of fact before the IRS as well as the right to confront and cross-examine adverse witnesses in administrative meetings with them. According to the IRS, this happens at the Examination level of contact, which is the earliest actual point of contact in the administrative process. This is the level at which we must make a good faith effort to resolve a matter with the IRS, as the federal courts have ruled that we must try to resolve matters at the lowest level of contact. The IRS used to just skip over the Examination Interview, but apparently have been using it more often over the past six months.

It is also at the Examination level that information regarding gross income is used by the IRS to determine "taxable income." That information comes from the W-2 and 1099 forms submitted by employers and payors. It can also come from the 1040. These provide the IRS with "prima facie" evidence of gross income and brings on the matter of plausible deniability. The IRS is using third-party reports alleging gross income paid (remember 61) that is taxable for the purposes of the income tax as per 63. So the W-2 and 1099 forms are at the root of the problem, because for most citizens the W-2 and 1099 forms should not be submitted, since, as we discussed earlier, they are not earning income from a taxable source (remember the distinction between "sources" and "items"). The contention of fact is made by filing the Form 4852 when W-2 or 1099 forms are issued or are in contention.

At the Examination Interview we bring up issues concerning our due process rights pursuant to Goldberg:

1) that the IRS failed to inform us of our rights prior to the meeting;

2) that they failed to provide us with copies of the evidence against us so that we could prepare a defense;

3) that they failed to notify us of any proper process or forms for disputing the W-2 or 1099 reports;

4) that they did not legally verify the W-2 or 1099 reports with a legal line of questioning;

5) that we are making legal contentions against the legal nature of the allegations on the W-2 or 1099 reports;

6) that we demand all of the government witnesses and evidence be presented in an administrative examination meeting, on the administrative record, to be scrutinized and undergo confrontation and cross-examination.

7) that we want to know when this meeting will be held;

8) that if it's not going to be held, we demand the Examination Division seek technical advice on procedure from the National Office, pursuant to 26 CFR 601.105, and complain that this is another right they have failed to inform us of despite the Technical And Miscellaneous Revenue Act of 1988 (the Taxpayer's Bill of Rights).

At this point the gauntlet has been laid down and the staring contest begins.

The IRS can choose to get technical advice from the National Office on our 6th amendment right to confrontation and cross-examination. If they do, it is uncertain what that advice will be, and may vary among different regions. If they choose not to allow confrontation and cross-examination at the Examination stage, then they violate our 6th amendment right, as only at the Examination stage can witnesses be summoned pursuant to National Delegation Order #4. This has been acknowledged by the Milwaukee Appeals Office.

If they rule in our favor, the IRS can either drop the matter or summon the witnesses to testify about the law that they relied on in submitting the W-2 or 1099 reports. Most employers don't have a clue, which will prove that their information on the reports is based on hearsay and not grounded in law. This would open up the case to be argued as a "Naked Assessment" (see Taxgate.com article of same name). If the IRS proceeds, they violate our 6th amendment right to confront as well as our 1st amendment right to be heard, since they paid no heed to the Form 4852 and our defense. The IRS never heeds the 4852s or gives our contentions disputing the W-2s or 1099s any legal consideration. At this point, Senators and Congressional representatives are contacted with complaints informing them of the denial of due process by the IRS.

The IRS typically moves on to a Report of Examination Changes (REC), in which they show their calculation of taxable income and an amount due, to which we respond again with the 4852 and make contentions of a factual nature and demand our right to confront and cross-examine, and that the examiner respond to the information. If still unresolved, the next step is a meeting with the examination supervisor to hear our Examination Division appeal against the examiner's determination, and demand that they bring the witnesses and evidence forward. At this point we can still demand that they seek technical advice from the National Office, if not already given.

The IRS usually skips the Examination Division appeal, and skips the appeals process and the Appeals Division and goes straight to the Notice of Deficiency and tells us we can take the matter to Tax Court. However, the Tax Court is not where we want to go, because that would not address our issues, which relate to denial of due process. We would be told that we have not exhausted all administrative due process and remedy, even though the IRS did not provide administrative remedy. Federal District Court is where we find authority to adjudicate constitutional questions of due process rights under the 1st, 5th, and 6th amendments. Petitioners would argue that administrative due process rights have been violated by the IRS and that damages, while they have not yet occurred, are imminent and about to occur.

We continue to complain to our congressional representatives about the due process violations of the IRS and demand that they take action to see to it that the IRS acts according to 26 USC 6212(d) to remove the Notice of Deficiency and remand the matter back to the Examination Interview and provide us with all of our due process rights under the law and as determined by the Supreme Court.

The next steps are the Notice of Intent to Levy and Final Notice of Intent to Levy, and we respond to those in the same fashion. The blinking moment in the staring contest is the Notice of Federal Tax Lien. This document constitutes damages for which a claim for relief can be granted and the initial Judicial Government Defense of Rule 12(b)(6) can be defeated. It is at this point that action must be taken on grounds of denial of due process at the statutory, regulatory, and constitutional levels to stop the levy before it occurs. If it proceeds further, the lien will come under the protection of 26 USC 7421, which bars the enjoinment of a court to stop the collection of a tax. It is not clear how a statute can tell the court what it does and does not have jurisdiction over, especially with regard to constitutional issues, but that is what is done.

The court does not have to worry about overturning the whole tax system by ruling in our favor. They have merely to direct that the matter be sent back to the Examination level to be properly handled. This would probably allow it to die a quiet death, without causing the kind of public disturbance that makes bureaucrats so uncomfortable. Yet the victory will have been won.