Clearing Up Some Confusion About 1040s

OVER THE YEARS I'VE OBSERVED A CONFUSION in certain quarters over several issues related to 1040s. I'm going to endeavor to address a few of those issues in this article.

To begin with, there is a long-standing, unfortunately-deeply-embedded and -persistent belief in the minds of some folks that it is only the submission of a 1040 that allows a tax liability to arise. Not so.

As a matter of legal doctrine, liability for the tax technically arises at the time of the conduct of the taxable activity. If you've done the taxed thing, you owe the tax-- right then. A variety of protocols might dictate that other things must or can happen between that arising of technical liability and any actual payment, and in any event, even a technical liability must become a formal liability by being defined (that is, asserted, spelled out and supported by testimony) in order to be lawfully collected. But all that is necessary for a liability to arise is to have done what Congress has made taxable (within the limits of its authority to do such things).

The 5th Circuit Court of Appeals discusses this usefully in State Farm Life Ins. Co. v Swift, 129 F.3d 792 (5th Cir. 1997):

In Moran v. United States, the Seventh Circuit Court of Appeals summed up the importance of a tax assessment rather succinctly. The Court wrote: [A]n assessment is not a prerequisite to tax liability. Though the [taxpayers] make it out to be more, an assessment is only a formal determination that a taxpayer owed money. It is more or less a bookkeeping procedure that permits the government to bring its administrative apparatus to bear in collecting a tax. Indeed, our tax system would function poorly were not most taxes "self-assessed." A formal IRS assessment is an important determination in many cases, and the threat of one is a significant means of maintaining a system of voluntary compliance, but it is neither the beginning nor the end of tax liability. 63 F.3d 663, 666 (7th Cir.1995) (citations omitted). This language amplifies the distinctions we draw in the present case. Assessment is an effective tool for notifying a taxpayer of additional tax liabilities. It is a clear signal for when the statute of limitations begins to run. It also creates a concrete and specific risk that penalties and interest will be assessed. An assessment does not create or change the taxpayer's initial tax obligation that was owed, however.

ANOTHER CONFUSION CONCERNS THE PROVISION OF LAW under which the requirement to file a 1040 arises. Some imagine that a liability must be pre-defined by some other means before a return is required. This error seems to be based in mistaking the causation of liability as discussed above in combination with a focus on the language of 26 USC § 6011, (which provides, under the heading "General Requirement of Return, Statement or List" and in its first subsection "General rule", that,

 "When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations."

 The error is to imagine that "made liable" in this language means something along the lines of "personally declared liable", when it really means "having become liable". It also involves overlooking the provision reflected in 26 USC § 6012:

"(a) General rule Returns with respect to income taxes under subtitle A shall be made by the following: (1) (A) Every individual having for the taxable year gross income which equals or exceeds the exemption amount..."

 It is the latter provision that actually imposes the 1040 filing requirement, and it is imposed upon ANYONE who "ha[s] for the taxable year gross income which equals or exceeds the exemption amount" (with some exceptions which are listed further on in the sub-section). No personalized declarations of liability or obligation are needed-- if you've chosen to use Uncle Sammy's stuff (and succeeded in doing so gainfully to the degree specified), you've agreed, as part of the deal, to this requirement, and in the course of fulfilling it, you will create a formal liability to which you are subject.

 Further, even if you HAVEN'T qualified for this return requirement, it can be effectively imposed on you anyway as a result of allegations by others to the contrary, or the need to recover improperly withheld or paid-in amounts. For more on that, click here.

ANOTHER MISUNDERSTANDING ABOUT 1040s concerns what is being attested-to by way of the affiant's statement on a tax form known as the "jurat" (That's the statement above the signature declaring that the entries on the form and accompanying schedules and other documents are true, correct and complete to the best of the signer's knowledge and belief.) Some folks have conceived of a fear that in reporting, for instance, an amount of "wages" on a 1040 (whether $0 or otherwise), one is expressing a "conclusion of law" (i.e. that one's earnings do or don't legally qualify as "wages"), and thereby invalidating the instrument as a functional affidavit.

Let me point out first of all that if this were so, then EVERY TAX FORM WOULD BE INVALID-- just as much every W-2 as every 4852; just as much every IRS "examination report" as every 1040; just as much every 1040 on which the filer simply transcribed numbers from a W-2 or 1099 as every 1040 on which the filer declined to do so. Every tax form comprises declarations of the sort over which this concern arises; if any are invalid, all are invalid, and therefore just as no form would stand in the filer's favor, neither would any stand against him.

 But while entries on the form do indeed qualify as "conclusions of law" (in the sense that they constitute conclusions as to the application of legal meanings and prescriptions to a set of facts-- a filer is asked to report how many apples he has, by applying the definition of "apple" provided in the law to what he finds in his pantry), the jurat on a tax form is not really an attestation as to the correctness of those entries (which are, after all, matters of objective, determinable fact). It is, rather, an attestation as to the fact that the affiant believes that what is entered are true, complete and correct conclusions.

This may seem at first glance to be a distinction without a difference, but it is not. Understand that in the contest of which a 1040 is a part, the 1040 filer is not the plaintiff. He is the defendant, and bears no burden of proof regarding any entry. His declarations as to amounts of taxable activity engaged-in are purely responsive-- admit or deny. He is not claiming the government's money-- he is merely responding to the government's attempt to make a claim on HIS money (a response which may end up including a request that amounts withheld or paid-in and currently in escrow be returned, as a natural result of completing the specified response form in accordance with its instructions).

FINALLY, (INSOFAR AS THIS ARTICLE WILL EXTEND), some confused by the purpose of a 1040 are afflicted by a fear that the use of the form (or any other tax form) somehow constitutes making adverse admissions about oneself or one's activities, or supporting adverse presumptions, no matter what one says on the form (or in some minds, especially if one expresses what is believed to be true about one's "income" receipts). Nothing could be further from the truth.

First, of course, the primary purpose of the form is as a rebuttal instrument. The original statutory provision by which the form is specified says this clearly:

"Provided, that any party, in his or her own behalf, or as guardian or trustee, as aforesaid, shall be permitted to declare, under oath or affirmation, the form and manner of which shall be prescribed by the Commissioner of Internal Revenue, that he or she was not possessed of an income of six hundred dollars, liable to be assessed according to the provisions of this act, or that he or she has been assessed elsewhere and the same year for an income duty, under authority of the United States, and shall thereupon be exempt from an income duty; or, if the list or return of any party shall have been increased by the assistant assessor, in manner as aforesaid, he or she may be permitted to declare, as aforesaid, the amount of his or her annual income, or the amount held in trust, as aforesaid, liable to be assessed, as aforesaid, and the same so declared shall be received as the sum upon which duties are to be assessed and collected."

As this language plainly says, the 1040 (which is "the form and manner" prescribed by the Commissioner-- see pp. 163-175 in CtC) is actually the means by which adverse presumptions (that a liability exists, along with all the associated requirements and legal infirmities) are OVERCOME. This structure and use of the form remains the case today. Click here to see how this benign and adverse-presumption-negating function of the form remains fully embedded in the law.

Another thing being missed by those suffering from this debilitating notion is the understanding that the core "adverse presumption" they fear is already in play. Ever since this knowledge was successfully excised from most Americans' minds by the 1940s, the government has managed to arrange for allegations of the conduct of taxable activities to be made about nearly everyone (in the form of W-2s, 1099s and K-1s, for instance).

As a consequence, governments in the USA have gotten into the habit of presuming by default that everyone has engaged in taxable activities, and behaving accordingly in the expectation of encountering little or no resistance or rebuttal. Again, the solution to this problem on an individual level is the submission of an accurate, educated 1040 package; the solution on a systemic level is spreading this link to every single person in America, as quickly and vehemently as possible.

 Further, and however unsettling it may seem to some, it is by NOT using the form that adverse presumptions are given life. To not file a 1040 is simply to admit what has been alleged by others-- as observed by the 2nd Circuit in United States v. Schiff, 919 F.2d 830, 832-33 (2d Cir. 1990):

"It is clear, however, that when a taxpayer does not file a tax return [and anyone who has not filed a rebuttal in the face of allegations of the receipt of more than the exemption amount of "income" will be deemed to be a "taxpayer", and properly so -PH], it is as if he filed a return showing a zero amount for purposes of assessing a deficiency."

To not file when allegations of the receipt of "income" have been made is to endorse every such unanswered allegation, and every related presumption and implication (including possible criminal penalties for "failure to file"). For more on the very bad practice of "non-filing", see this.