IRS recognizes only deductions authorized by statute.
David I think our point of disagreement is not really whether or not to send a letter to IRS but whether it is proper to file a 1040 claiming a LMR deduction. As much as I agree with the process of remedy presented in this forum, I think filing a 1040 while taking an LMR deduction is a big mistake.
If I am intent on persuading you to do anything, it would simply be to recognize that signing and submitting a 1040 (especially one with a W-2 form attached) is not a good idea if one is trying to assert that one is not subject to IRS jurisdiction, whether you rely on LMR or anything else. They have the right to presume you are a "taxpayer" if you file a "taxpayer" form. They will presume your agreement with any W-2 attached. The "wages" reported on W-2 are "income" under IRC.
As for the LMR deduction: The Internal Revenue Code recognizes deductions related to the conduct of a "trade or business within the U.S". and certain personal deductions like home mortgage interest. By redeeming lawful money, you are opting NOT to conduct a trade or business within the U.S. Lawful money redemption is therefore not a recognized statutory deduction in the Internal Revenue Code, and taking such a deduction on a 1040 is asking for trouble--even assuming that LMR is lawful and legitimate.
A similar example (albeit one with no lawful basis) is the slavery reparations deduction. Some people got the idea at one point to take deductions for slavery reparations and actually got refunds at first--but it became common enough for IRS to tell their clerks to watch for this bogus deduction and eventually added that to their list of frivolous positions. In fact, any position arguing against tax liability can be called "frivolous" when being used by a "taxpayer" because a "taxpayer" is by definition a person subject to an internal revenue tax.
Why take any chance that they will think you are a "taxpayer" by filing a return when it is not necessary to do so?
If LMR leaves one with less than the exemption amount of "gross income", then one would certainly not be required to file a return. See IRC 6012.
If one needs to claim a refund of withholding, one could do so informally without the use of a 1040 form (there is an IRC provision for this). If you claim to be outside their jurisdiction, such a refund claim could be made informally under principles of equity, and not under the authority or requirements of any statute. Such a claim could be made in any way you see fit. Just don't use a 1040, to avoid confusing the issue.
If LMR results in no tax liability, then one could properly claim exempt on W-4, and going forward it would not be necessary to claim a refund at all. (Unless one wants to make a claim for refund of FICA--but let's stay on point.)
A suitor claiming not to be subject to income should not file a 1040 or any other tax return. One can claim (if it becomes necessary) that LMR relieves one of the requirement to file (I think it is a matter of personal preference whether one does this in reaction to a demand to file or proactively to pre-empt such demands).
Assuming one has a W-2 or 1099 issued to IRS reporting income, one might prefer a proactive approach, as I believe you would actually be helping IRS to not waste their time with you demanding that you file a return, so they can concentrate on those who are properly in their jurisdiction.
As you said in a prior post, you do not need IRS approval for what Congress has already approved. I agree. Exactly why I believe filing a 1040 (a statutory requirement of IRC) is unnecessary and likely to be counter-productive.
If you are redeeming lawful money and are concerned that a W-2 might create a presumption of liability/filing requirement, you can sit back and wait for IRS to claim you need to file a return, and explain at that time that you have no filing requirement because you redeemed lawful money, or you can communicate with IRS as soon as the W-2 is issued to dispel the presumption of liability/filing requirement.
Re "let us know how it goes":
I already have employed the "IRS letter" technique (as have several friends of mine) to support my general position that I am never required to file an income tax return if my earnings were solely from my labor working in the private sector within the 50 states. I wrote a letter to the Commissioner of IRS and Secretary of Treasury, sent certified mail, return receipt requested, to explain that, contrary to popular opinion, I consider myself not subject to taxation on money made in exchange for my labor within the 50 states. For any year where my earnings come solely from working at a job in the private sector inside the 50 states, I therefore do not have "gross income" at or above the exemption amount, and I am thus not required to file an income tax return pursuant to IRC Section 6012. I use Supreme Court cases and their own Code and regulations to support my position, but that's the gist. A suitor could explain his understanding of LMR. We do not need to convince anyone of anything. We are only making a record that we tried in good faith.
Neither the Commissioner or the Secretary have ever responded to any of these letters and they have therefore defaulted on that issue. I have not filed a tax return since then. If I were to be asked at some point to explain why I am not required to file, I could prepare an affidavit of default explaining my reliance on the letter I sent and their failure to respond. This provides me a reliance defense and sincere belief defense, a la the Cheek v. United States Supreme Court case.
I did not mention LMR in the letter I describe, because I was not aware of LMR at the time. But it makes little difference what I said in the letter, as I invited a rebuttal, made clear I would rely on their silence as agreement, and got no response. The letter is meant to take advantage of my observation from much experience that IRS refuses to respond in good faith to such inquiries. I hardly expected them to say "Yes you are right! Don't tell anybody!" but they cannot remain silent and then later complain when I rely on their silence. In U.S. v. Tweel a Federal Court stated that "Silence can only be equated with fraud when there is a duty to speak, or when an inquiry left unanswered would be intentionally misleading."
As a practical matter, this tactic is meant as a long term insurance policy against IRS harassment. The letter is ostensibly written to the IRS but is also written to a theoretical jury that may someday be charged with deciding if I have acted willfully in "violating the law". Understand that a jury does not get to evaluate whether or not you were in violation of the law; they will be instructed by the judge that you were "wrong", that you were required to file, that you are liable for tax on your income. The jury will hear that as "everybody is required to file, and everybody owes tax on all that comes in". Examine any federal tax case and you will see this is how it is done. The jury only gets to decide the facts of the case: that is, if the defendant willfully violated a known legal duty. But it will be considered a given that you had a duty. By IRS knowing this letter exists, I feel I am less likely to ever be the target of wrongful prosecution to "make an example" of me. Something one should think about if he plans on exercising remedy for the rest of his life.
The letter is also useful for deflecting administrative harassment and avoiding unnecessary hassles with IRS: If an IRS agent later wants to take the position that I am indeed required to file, wants to prove that, and tries to reject the position I expressed in my letter to the Commissioner, then the IRS agent surely would have had a problem with those same views if expressed on a 1040 return, and very well might have chosen to penalize me with a frivolous return penalty rather than have any discussion, or worse, consider the filing an act of tax evasion or filing false documents which are both felonies. Likely? perhaps not. Possible? You better believe it. I decline to rely on the good graces of IRS. Perhaps you and I differ on that. To each his own.
To me the IRS is like a grizzly bear. You may very well have the bear safely caged with LMR. But its still a bear. I see no reason to stick my arm in its cage and try to thump it on the nose. That is what filing a 1040 and taking LMR deduction represents to me.