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How to Dispute 3rd Party Information Return

INTRODUCTION
The Tax Return Team is committed to helping those who are in CDP or Tax Court and who are
having administrative or judicial difficulties with the IRS. A large number of people who contact
us have filed a “Hendrickson” return and are now experiencing the wrath of the IRS against
them. The reason I say “Hendrickson” returns is because the IRS actually has a stamp that they
are putting on Forms 4852 with his name. These returns are automatically being labeled
“frivolous” due to significant evidentiary and procedural problems. Accordingly, the IRS sends
them letters with language such as “failure to file,” “failure to pay,” “frivolous filing,” “fraudulent
filing,” “overpayment of the refund,” “we changed your account,” and other goodies.

Folks that are filing like Mr. Hendrickson advocated are getting steamrolled in Tax Court1,
sanctioned in Appellate Court2, and denied certiori at the Supreme Court3 like Mr. Walbaum in
all these instances. And Mr. Walbaum is hardly alone. He tried to claim Social Security and
Medicare on a federal income tax return and used a Form 4852 to claim $0 wages but listed
amounts of Social Security and Medicare withholding.

On February 7, 2011, one of Mr. Hendrickson’s closes adherents, Mr. Mooney, was sanctioned
by the Tax Court (a 2nd time, doubling the prior sanction) for trying to get a refund of Social
Security and Medicare on his federal income tax by claiming $0 wages but listing amounts of
Social Security and Medicare withholding4.

Aside from the fact that the refund regulations do not allow a claim for Social Security and
Medicare on a Form 10405, there are other problems with Mr. Hendrickson’s administrative
remedy which we’ll outline below. In summary, we intend to show the following points:
• The law and the regulations do not give the recipient the right to correct an
information return;
• The principal problem with using a Form 4852 to correct a Form W-2;
• The facts behind a reasonable dispute with a 3rd party return;
• How to cooperate with the Secretary
• How to make a reasonable dispute
• Erroneous 3rd party returns vs. Fraudulent 3rd party returns
• Formal claim for refund without using IRS forms

INSUFFICIENT ADMINISTRATIVE REMEDY


Mr. Hendrickson has put his freedom on the line in defense of his administrative remedy in
claiming a refund of monies paid in as internal revenue taxes. While we agree with most of his
understanding of tax law as explained in his book, Cracking the Code, we believe it is important
to understand that Mr. Hendrickson's administrative remedy is insufficient to rebut 3rd party
reporting. Mr. Hendrickson maintains that by using a Form 4852, one may correct an erroneous

1 Walbaum v. CIR, Tax Court Docket 9372-09


2 Walbaum v. Commissioner of Internal Revenue, Court of Appeals, 8th Circuit 2010 (unpublished)
3 Walbaum v. CIR, Supreme Court 2011 (certiori denied)
4 Mooney v. CIR, T.C. Memo 2011-35 (2011), docket 8128-09
5 26 CFR 301.6402-2 “c) Form for filing claim. Except for claims filed after June 30,
1976 for the refunding of overpayment of income taxes, all claims by taxpayers for the refunding of [taxes,
interest, penalties, and additions to tax shall be made on Form 843.
How to Dispute 3rd Party Information Return

W-2 (CtC, pg. 177), or in the case of a Form 1099, one simply checks the box marked
“Corrected” (CtC, pg. 176).

Disillusioned by many losses in tax court suffered by many who have followed Hendrickson’s
administrative remedy, we set out to explore why his remedy fails to make a reasonable dispute
to 3rd party reporting and uncover what constitutes a reasonable dispute as demanded by Title
26. Our experience, Tax Court, the Internal Revenue Code (26 USC), and the regulations that
govern it (26 CFR), all demonstrate why his administrative remedy will never gain acceptance in
the courts on any level.

ASIDE: We found it fascinating that Tax Court and the Appellate Courts continuously refer to
Forms 1099, 1098, W-2, etc. as 3rd party information, 3rd party returns, or 3rd party
information returns. Even the courts recognize that this information is not first– but
third–hand, yet accept this information over one’s first–hand sworn testimony—
something Mr. Hendrickson complains about bitterly. What’s going on?

CORRECTING A FORM1099
According to the IRS implementing regulations that govern Forms 1099 among others (26 CFR
301.6011-1)6, only the payer may correct a 3rd party information report. It is wrong and
potentially fraudulent for the recipient of the form to mark the “Corrected” box and proceed to
change the form. Instead, the recipient must make a reasonable dispute in a court proceeding
(26 U.S.C. § 6201(d)) before any such “correction” will be “accepted.” If you assert the Form
1099 is incorrect, the only way you will get a chance to prove your claim is in a judicial setting,
most commonly, Tax Court. There you must establish a reasonable dispute to shift the burden of
proof to the Secretary.

CORRECTING A FORM W-2


Mr. Hendrickson maintains that the proper way to correct a Form W-2 is by using a Form 4852.
On its face, that seems correct; in practice, that's not what's happening. Case law requires that
the recipient must attempt to contact the payer to correct the form7,8, because the payer is the
only one who can submit a Form W-2C, which corrects a previously issued Form W-2.
Moreover, if the recipient fails to contact the payer, the burden of proof may not necessarily shift
to the Secretary.

Tax Court has consistently maintained that because there are withholding amounts (federal, SS,
or Medicare) indicated on the Form 4852, wages must have been earned. (Remember that a
Form 4852 is signed under penalties of perjury by the recipient who thereby swears that the
figures and what they represent are true.) Court decisions reason that withholding occurs only

6 (b) The Internal Revenue Service may prescribe in forms, instructions, or other appropriate guidance
the information or documentation required to be included with any return or any statement required to be
made or other document required to be furnished under any provision of the internal revenue laws or
regulations.
7 Morgan v. CIR, 2010 TC Summary Opinion 29 - Tax Court 2010
8 Fitzpatrick v. CIR, 2009 TC Summary Opinion 102 - Tax Court 2009
How to Dispute 3rd Party Information Return

with those who have received wages. If you have withholding listed on a Form 4852, it is self–
evident that you must have had wages to withhold from. Therefore, a claim of $0 wages on a
Form 4852 is frivolous at best, fraudulent at worst.

From a mathematical point of view, it’s impossible to fill-in the line for federal income tax
withheld but then claim $0 wages. For FICA, 7.65% of $0 wages = $0 withholding. But let’s do
the math for federal income tax withheld.
$0 wages
× 28% federal income tax withholding rate
$0 federal income tax withheld

As you can see, a common sense mathematical approach conclusively shows that it’s
mathematically impossible to have withholding on $0 wages. But if you decide to declare
withholding, then it’ll be easy to determine the actual wages despite what you put on the Form
4852. Let’s do that math.
28% tax bracket * X? = $14,000 federal income tax withheld
Solve for X. The amount of wages (X) = $50,000

As you can see, if you claim federal income tax withholding of $14,000, you are most likely in the
28% bracket and your wages can be mathematically calculated as $50,000. Thus, if you claim
$0 wages, simple math cannot support your claim.

Further, what's become obvious is that, regardless of our first–hand testimony in court, the
numbers on the Form 4852 indicate amounts of payroll deductions but characterize those
payroll deductions as federal, SS, or Medicare withholding.

CONCLUSION
The responses from Tax Court, the IRS, and simple logic demonstrate that a Form 4852 doesn't
succeed in making a reasonable dispute to 3rd party information reports.

WHAT IS A REASONABLE DISPUTE?


According to 26 U.S.C. § 6201(d)

In any court proceeding, if a taxpayer asserts a reasonable dispute with respect to


any item of income reported on an information return filed with the Secretary ... by a
third party, and the taxpayer has fully cooperated with the Secretary (including
providing, within a reasonable period of time, access to and inspection of all
witnesses, information, and documents within the control of the taxpayer as
reasonably requested by the Secretary), the Secretary shall have the burden of
producing reasonable and probative information concerning such deficiency in
addition to such information return. [emphasis mine]

Notice that if you want the Secretary to have the burden of proof (and you do!), then the only
venue to properly challenge 3rd party information is in a judicial setting. Here's the basis for that
law:
How to Dispute 3rd Party Information Return

Taxpayer Bill of Rights, March 28, 1996, House Report 104-506 1996, pg. 36
b. Requirement to conduct reasonable investigations of information returns (sec. 602
of the bill and sec. 6201 of the Code)

Reasons for change
Taxpayers may encounter difficulties—
• when a payor issues an erroneous information return and refuses to correct
the information and report the change to the IRS, or
• when a fraudulent information return is filed. [formatting and emphasis mine]

FULLY COOPERATE WITH THE SECRETARY


In order to assure the burden of proof remains with the Secretary, you must fully cooperate with
the Secretary in the following ways:

A. Bring reasonable dispute over the item of income to the attention of the IRS within a
reasonable period of time. A reasonable period of time includes the following
correspondence:

• Responses to IRS letters and notices


• Notices to the Commissioner about the fraudulent information returns
• Challenging the fraudulent issuance of the information returns as part of the CDP
hearing
• In response to a proposed substitute for return
• In a tax court petition

B. As reasonably requested by the Secretary, provide (within a reasonable period of


time) access to and inspection of all (1) witnesses, (2) information, and (3)
documents within the control of the taxpayer.

So in order to shift the burden of proof onto the Secretary, there are really two key elements
here: (1) make a reasonable dispute; and (2) cooperate fully with the Secretary.

MAKE A REASONABLE DISPUTE


In Spurlock9, the Court states that “[the taxpayer]did not make her dispute known to the third
parties who prepared the information returns she claimed were fraudulent.” In Wong, the Tax
Court issues a similar ruling by stating, “Petitioner did not assert that the issuance of the Form
1099 was fraudulent.”10.

If we wish to contest an information return, we have to positively assert that the 3rd party
information return was fraudulently issued. As shown above in the Taxpayer Bill of Rights, these
are not our words but those of Congress.

9 Spurlock v. Commissioner, T.C. Memo. 2003-124


10 Wong v. CIR, 2009 TC Summary Opinion 152 - Tax Court 2009
How to Dispute 3rd Party Information Return

According to the court, we don't have to make a complete case in order to make a reasonable
dispute
“[T]he statute does not require a taxpayer to provide independent
documentation proving that a disputed information return is erroneous as
a prerequisite to raising a reasonable dispute under section 6201(d)...”11.

ERRONEOUS 3RD PARTY REPORTING


We propose that if you merely argue that a 3rd party information return is erroneous, you
implicitly admit receiving taxable income because–

1. Only “employees” are issued information returns denoting income.


2. Only an “employer” is legally able to correct an error on a Form W–2.
3. Employers pay employees “wages” so your disagreement could only legitimately be about
the amount reported, but not the characterization of those amounts (wages, withholding,
etc.).

Thus, attacking the W-2 as erroneous is insufficient to dispute your status as an employee
working for an employer earning wages. This is why a Form 4852 does not have what it takes to
“rebut” a Form W-2 because a Form 4852 is a substitute for a Form W–2 and contains all the
presumptions of a Form W-2 (the only difference being the person who subscribes it).

FRAUDULENT 3RD PARTY REPORTING


Since there are problems with reporting the 3rd party information report as erroneous, Congress
only gave us one other option: a fraudulently filed report. There are two instances where we
could see this occurring:
• You did not engage in a taxable activity but a 3rd party claims that you did; or
• The payer lacked legal authority to issue a 3rd party information report.

Thus, you must assert that the 3rd party information return was fraudulently issued. We realize
that declaring fraud is a steep climb, we don’t believe the issuance is actual fraud, but rather
constructive fraud. We’re working to determine all the elements and to see how Congress
intended us to use that language to describe how a 3rd party report is issued.

Finally, according to Spurlock and Wong, supra, the recipient of the information return has the
burden of notifying the issuer that they fraudulently filed an information return. And you must
also notify the Commissioner that the information return in question was fraudulently issued.

FORMAL CLAIM FOR REFUND V. IRS FORMS


The last problem with Mr. Hendrickson’s administrative remedy is that it relies on a non-taxpayer
using IRS forms. We are of the opinion that tax forms are required for those made liable under

11 Fitzpatrick v. CIR, 2009 TC Summary Opinion 102 - Tax Court 2009


How to Dispute 3rd Party Information Return

the law for any internal revenue tax. If you did not receive taxable income, then we don’t believe
you should use IRS forms to file for a refund.

For non-taxpayers who have been treated as taxpayers, case law permits filing a “claim for
refund” using your own form in your own words.

One reason for this is that §7203 requires a “return” but does not define that word or
require anyone to use Form 1040, or any “official” form at all. All that is required is a
complete and candid report of income.12

In practice, the courts have not adhered to such a rigorous standard but have developed their
own “informal refund claim” standard. This doctrine originated with the Supreme Court’s ruling in
United States v. Kales, 314 US 186 (1941), which recognized a taxpayer’s right to claim a refund
based upon an informal claim. The claim must be perfected through a statement that the claim
is made under penalties of perjury13.

SUMMARY
We absolutely do not agree with Mr. Hendrickson’s administrative remedy because it is defective
and cannot be sustained. And we haven’t begun to look at the evidentiary problems of “standing
pat” on the Form 4852 as Mr. Hendrickson believes.

What is the remedy?


• Everyone should be courageous and look at the defects of Mr. Hendrickson’s method
and try to reconcile it with the law, the regulations, and outstanding case law. The
goal is to perfect what he started.
• Look at what presumptions are created when a non-taxpayer uses forms designed
for a taxpayer.
• A Form 4852 presents an evidentiary problem because it is insufficient in and of itself
to establish the truth of the matter. And your self-serving declaration that you didn’t
earn wages is hardly convincing. Your first-hand witness testimony doesn’t make
your bad math or your sworn numbers and figures become something they aren’t.
• Mr. Hendrickson’s own example showed what will happen when one stands “pat” on
the Form 4852. His company issued a 3rd party return under penalties of perjury and
he issued a “rebuttal” Form 4852. Thus far, all is equal. But then the Commissioner
brought additional credible and probative information in addition to the information
return which met his burden or production. He won.
• Congress already provided you the factual basis for contesting a 3rd party information
return. You must contest it as erroneous or fraudulent.
• Do everything you can to keep the burden of proof on the Commissioner.

12 United States v. Patridge, 507 F.3d 1092 (7th Cir. 11/14/2007)


13 Pennoni v. United States, Fed. Cl. 06-861T (2009)

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