Federal Tax Law Basics

How is the tax law structured?

How is the law applied?

* The Internal revenue laws are limited in application.

* The Internal Revenue Code encompasses more than just "income tax."

* The Code is divided into 11 subtitles. The first 5 subtitles each deal with different categories of taxation. The last 6 pertain to "Procedure and Administration" (subtitle F), "Joint Committee On Taxation" (subtitle G), "Financing The Presidential Election Campaign" (subtitle H), the "Trust Fund Code" (subtitle I), "Coal Industry Health Benefits" (subtitle J), and "Group Health Plan Portability" (subtitle K).

* Subtitle "A" is income tax.

* Subtitle "C" is employment tax or social security tax.

* Subtitle "A" is in no way related to subtitle C.

* The W-2 and 1099 "wage" information commonly reported by employers is a function of the tax on wages under subtitle C (not income tax) for the purpose of building credits towards social security. The tax on wages has absolutely nothing to do with the tax on income under subtitle A.

* The "income tax" under subtitle A is an "indirect" tax in the form of an "excise" imposed on certain "activities" or "occupations" and a liability to pay the tax must arise from statute.

* The only statute under subtitle A (income tax) making anyone liable is section 1461 which applies to withholding agents who are required to withhold only from foreign entities like nonresident aliens and foreign corporations.

* The only requirement for an individual to file a return under subtitle A (income tax) is section 6012(a). The Internal Revenue Service identifies the imposition of the income tax and the type of income that is considered "taxable income" for the purpose of this filing requirement in their request to the U.S. government's Office of Management and Budget (OMB) which must "approve" the administration and enforcement of the applicable regulations. Taxable income for the purpose of this section is limited to certain income that has been "earned" while living and working in certain "foreign" countries or territories. According to the OMB, the return that is required under this section of the Internal Revenue Code is Form 2555 (not the 1040) and it is entitled "Foreign Earned Income." According to the regulations, 26 CFR part 600 to end, the 1040 return is merely a supplemental return or worksheet for the required Form 2555.

* Treasury Decision 2313 clarifies that the Form 1040 individual income tax return is appropriate for any person acting as a fiduciary for a nonresident alien and receiving interest and/or dividends from the stock of domestic (US) corporations on behalf of that alien.

* The income tax under subtitle A is mandatory for those mentioned above (but only for those to whom it applies). It is NOT voluntary as some have asserted. Since the law is limited in application, the question of whether it is mandatory or voluntary is superfluous. The question is: to whom, and under what circumstances is the law applied?

* Certain legal requirements with regard to the wage tax under subtitle C may also be considered mandatory, but only for the payor of the wages (the employer) and even then, only if both the employer and the employee have voluntarily agreed (via application) to participate in the entitlement program. Since neither can be compelled to participate, compliance is said to be voluntary.

The foregoing statements are NOT legal advice. They are merely factual statements about the law.

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