IRS inquiry: Do incorrect 1099s need rebuttal?

[ManOntheLand]

OK David, thanks for clarifying. You seem concerned about not unnecessarily putting oneself into IRS jurisdiction (rightly so I think). So in the case of no third party reporting to IRS, would you in that case suggest not filing anything, based on there being no presumption of liability?

I think that would be fine as long as one has evidence of LMR ready to show if necessary. For a four year stretch I earned a living with no third party reporting to IRS, I had never heard of redeeming lawful money, did not file, and never heard a peep from IRS.

I agree with you that a W-2 or 1099 has already established a presumption of liability. Therefore I see no harm at all (and in fact a great advantage) in writing a letter to IRS to rebut that presumption showing my evidence of LMR and asserting no filing requirement, which they cannot penalize with a frivolous return penalty. One caveat: I will not claim a refund in such letter, as this may cause them to treat my submission as "a purported return" and subject me to the risk that they will then determine it is a "frivolous return". Case law has established that a document is in substance a return or purported return if it contains all the essential information a return would contain. I can think of no better way to avoid having my letter considered a purported return than to assert in said letter that I am not required to file a return.

Such a letter would not be asking for IRS approval of LMR, but to assert my position that I am not required to file a return at all, based on LMR and my right to exchange labor for compensation without being taxed, and invite IRS to disagree and prove their case. I will ask that if they do not disagree, that they update their records so I will not be presumed to have any liability or filing requirement. I will then be all set to defend myself if I ever receive a notice claiming I need to file a return for that year. And again, I avoid any risk of having to deal with bills claiming I owe a $5,000 frivolous return penalty.

I have already done something similar: because of multiple frivolous penalties imposed on me for CTC returns (even after getting full refunds) I wrote to the IRS Commissioner and Secretary of Treasury about a year ago to complain about IRS abuse, IRS failure to ever explain what was wrong with my returns so I could correct them, and to assert that I believe I am not required to file as long as my earnings were from exercising my right to exchange my labor for money in the private sector within one of the 50 states. I cited standing Supreme Court decisions to support my position, asked a few yes/no questions, and invited a rebuttal within 30 days if they disagreed. I gave notice that I would rely on a lack of response as their agreement that I am not required to file and have no tax liability based on my earnings from private sector labor in one of the states. This was before I knew anything about LMR. I got no reply from either of them. Relying on their "blessing", I did not file for 2011 despite having some W-2's issued. As of now, I have not heard from IRS about 2011. I had claimed exempt throughout 2011 so there was no refund of income tax to get. So I am happy, and I guess they are too.

I believe you have suggested that once the first LMR return is filed and refund of all witholdings obtained, one might show proof of your full refund and exemption to the employer if the employer has any problem with an "exempt" W-4, is that correct?

I think it is wise to try to avoid trouble with the employer. That is all I am saying about IRS: it is wise to try to avoid trouble with them as well. I have yet to file a LMR return, as I just learned about LMR in 2012. But I have a 12 year run of paying no income tax, and in some of those years obtaining refunds through the CTC method. What I have tried to offer in my posts is some insight based on my experience as to how IRS reacts in real life to unorthodox returns. I have found it is wise to avoid dealing with IRS as much as possible, and not be overly confident that they always will do what they "should" do, no matter how right your position may be. In other words, I do not assume a cooperative attitude from IRS. I assume in all cases that they will do whatever they can get away with. Anticipating that, I try to leave as little wiggle room for IRS as possible in dealing with me.