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Recent correspondence from my favorite junk yard dogs has prompted me to share with you, my loyal readers, and with those who drop by occasionally to scoff, point and laugh, a simple, but accurate summary of an almost unimaginably vast fraud, the income tax. To that end, here is another of O’Boyle’s boldly oversimplified explanations of really important stuff (OBOERIS).

At the end of each tax year businesses and people who have paid other businesses and people certain minimum amounts during the year have been convinced that they are obliged to report what they paid and to whom. These reports are called “information returns.” The most common are W-2s, 1099s, and K-1s, though there are a few others. Copies go to the IRS and to the recipients of the payments.

These documents allege, in a legal sense, that the payments constitute “income” for purposes of the “income tax.”  Few payers have any idea of whether what they allege on those forms is true, but everyone assumes it is. When the payee receives his notice, he is actually being informed that testimony has been made to the government concerning the nature of the payment. The payee at that point can do a couple of things.

He could not respond. Non-response essentially grants permission to the tax agency to presume the reports are correct, create a Substitute for Return for calculating a tax liability, claim any withheld or prepaid funds up to the liability and issue a “Notice of Deficiency” for any unpaid balance.

Non-response may also invite the tax agency to impose punishments, such as a "failure to file" penalty. Penalties apply because the “information returns” allege that the payee received more than the minimum income that would require filing a return. The payee’s silence confirms the truth of the allegation.

On the other hand, the payee could respond to the allegations by filing a valid return. On the return he can either acknowledge the reported payments are “income” or, if he finds they are not “income” as defined in the statutes, as is the case with most private sector earnings, he can correct those allegations. In either case, the payee would take any deductions, credits and exemptions and calculate his liability according to the instructions, and self-assess his tax. Corrections to the mistaken “information return” figures often result in a liability of zero.

Once it receives the return, the IRS has a few options:

1. It can issue a refund check or credit if the self-assessed amount is less than the amount that has been withheld or is otherwise available for credit for that period.

2. It can bill the filer for any balance due if the amount assessed on the return is more than the amount available for credit for that period; or

3.  It can determine that the amount self-assessed is deficient and issue a "Notice of Deficiency"– but it can only correct calculation errors. For instance, if the filer added up some numbers wrong or made a mistake multiplying the tax rate by the taxable figure.

When a return has been filed, the agency has the authority to correct errors based on the reported “income” figure. It has no authority to change that figure.  This is why the agency often denies a return has been filed when it receives a correct return showing little or no taxable income. Pete Hendrickson, author of "Cracking the Code…" refers to this as the “my junk yard dog ate your homework” strategy.  That is also why any changes the agency proposes to the income figures on a return must be approved, with a signature under penalties of perjury, by the taxpayer before they become valid. The IRS has no authority to change returns without the approval of the filer.

There are other strategies the IRS uses to evade the law. Declaring returns “frivolous” is one. This is done in the hope the filer will back down from his sworn testimony. The Service counts on its two loyal thugs, Fear and Confusion, in this strategy. “Frivolous” returns may be ignored, which is what the Service wants to do to accurately filed returns.

A third strategy involves sending proposed changes that invite the filer to abandon his  original testimony. They propose alternate numbers on a handy form which the filer can sign under penalty of perjury. If he does so he has modified his original return. The filer says in effect, “It was all a big mistake.” Once again Fear and Confusion stand by the door fondling their pistols to help with the agency’s shake down of the baffled citizen.

The educated filer, however, has no need to back down from his sworn testimony, nor any reason to believe his private earnings are subject to tax as federal privileges. The Service’s own regulation couldn’t be more clear on the matter:

26 CFR Sec.301.6203-1 Method of assessment.

…The amount of the assessment shall, in the case of a tax shown on a return by a taxpayer, be the amount so shown…

Not the amount the Service proposes in its correspondence with you, nor the amount they wish you had put on your return, but the amount you show on your return. Only you can determine it. Only you can change it.

You, too, can become an educated filer. Visit Buy the book. Get up off your knees.