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An ever-growing group of American employers has stopped withholding taxes from their workers’ paychecks – citing federal tax laws as their authority – and some of them have even received refunds from the IRS as a result.

But challenging the taxman is not without its problems. The IRS has announced it will be actively prosecuting some business owners and their advisers “for tax evasion and other crimes,” because the businesses have stopped withholding, paying and reporting income, Social Security and Medicare taxes when paying their employees.

“The system simply cannot work if they get away with this,” former IRS commissioner Sheldon Cohen told the New York Times.

Yale professor and former Bush tax policy adviser Michael Graetz also warned in the article that the IRS must act, “or this will get out of hand very, very quickly.”

WorldNetDaily spoke with several businessmen and individuals who are part of the recent phenomenon. They say they are simply following the law and regulations to the letter and that it is the IRS representatives who are the scofflaws in this matter.

California businessman Nick Jesson of No Time Delay Electronics told WND his company does $15 million dollars in business a year. His company no longer pays taxes and does not withhold from 18 of its 22 employees, he said. The other four employees still pay taxes because they want to remain eligible for government entitlement programs.

Jesson, who says he is livid over being portrayed by the Times as a tax cheat and criminal, said his attorney is looking into filing a possible lawsuit, and he is also trying to negotiate with the newspaper to provide equal space for his side of the story.

Jesson credited his tax adviser, Thurston Bell of the National Institute for Taxation Education, or NITE, with helping his company to get $217,000 refunded from employment taxes it paid to the IRS in 1997.

A member of NITE, Jesson gave power-of-attorney to the organization to compose a response letter on his behalf to IRS Commissioner Charles O. Rossotti, which was mailed shortly after a Feb. 10 New York Times article.

According to that article, Rossotti “warned that people who are taken in by claims that they are exempt from taxes, ‘put themselves at terrible risk, both legally and financially,’ because the IRS ‘will take enforcement action to uphold the law.’”

Bell told WorldNetDaily, “We are going to have the letter published on a full-page ad in a national paper so that all can see how absurd and legally destructive the IRS’ threats of prosecution for evasion are. These employers are only guilty of attempting to exhaust the administrative remedy required in order to make a lawful claim that can be brought to court. I wonder how it is that they are going to criminalize a citizen exercising his responsibility to make proper testimony to the government?” Editor’s note: NITE’s ad appears in today’s print edition of USA Today. View ad here.

Jesson and roughly a couple dozen other employers who have gone public are acting on the “gross income” or “U.S. sources” legal argument. That argument says that according to the law, not all income is subject to the income tax. They say the law stipulates that only “gross income” derived from certain “sources” is taxable. The place to find the list of U.S. sources of income that are taxable, they insist, is in the oft-overlooked Treasury Regulations, which go hand in hand with the statutes.

Proponents of the argument say the IRS points to the broadest definition of taxable income in section 61 of the statute, which taken by itself can mean nearly everything is taxable to U.S. citizens, including a penny one picks up off the street.

But, they say, the IRS does not want people to look at the “rest of the story” — the pertinent Treasury Regulations that also have the force of law and which are there to interpret the statutes. The U.S. sources of income listed in the regulations as taxable by the secretary of the Treasury does not include most residents’ income within the 50 states, they say.

WorldNetDaily asked IRS spokesman Don Roberts if 26 USC S 861(b) and the related regulations in 26 CFR ? 1.861-8 are the specific sections to consult to determine one’s taxable income from sources within the United States as the “U.S. sources” argument proponents claim.

“No,” answered Roberts. “They apply to non-resident aliens. They’re picking up sections that aren’t even relevant to them. They’re not people who understand tax law. They are people who misunderstand tax law or, more likely in some cases, people who misconstrue the tax law. They are not tax experts. They missed the boat by a long shot.”

Where exactly are the argument’s proponents misreading the law and regulations?

“Probably from beginning to end in what they present,” he answered. “They are talking about the sections that relate to non-resident aliens who may be taxed upon U.S. source income. That’s what the section deals with. If they’d really like to know what the law says about the taxability of their income, they might take a look at section 61, too, where it defines gross income.”

Roberts continued, “I’m going to suggest a website for you to look at: http://www.taxprophet.com. This is a private-sector website put together by an attorney out in California named Robert Summers. Look at some of the stuff, especially what he has at the bottom of the page. Look especially at the link to the ‘tax protester hall of fame.’ Congress said in 1998 that we can no longer call them tax protesters, but everyone else can.”

Bell, founder and executive researcher of the Hanover, Pa.-based NITE, is generally recognized as the man who developed the “U.S. sources” argument into a practical approach for challenging federal tax law.

“The income tax is 100 percent legal and constitutional in its statutory and regulatory form,” said Bell. “NITE does not question the legitimacy of the internal revenue laws, but does scrutinize the IRS’ compliance with the whole of the law and its published procedures on a case-by-case basis.

“It must be remarked that the laws of our land are actually written more in our favor than we have been led to believe. By examining and learning our laws, we are in a better position to insist that they be obeyed, as written, and thereby provide a safe environment for our loved ones and future generations to flourish.”

Regarding Roberts’ statements, Bell told WND, ” If this section of law only applies to non-resident aliens, then I have a ton of questions about all of the provisions of the 1.861 regulations which refer to citizens and the Foreign Tax Credit, which I understand only applies to citizens and residents of the U.S.

“Since this is, as this man says, the section of law relating to non-resident aliens earning income from U.S. sources, where are the corollary statutes regarding foreign corporations earning income from U.S. sources? Where are the corollary statutes regarding resident aliens earning income from U.S. sources? Where are the corollary statutes regarding domestic U.S. corporations earning income from U.S. sources? Where are the corollary statutes regarding U.S. citizens earning income from U.S. sources?

“The fact is that the law is just as the secretary has stated. This is the only provision of law regarding income from U.S. sources, in very specific and particular terms, as the secretary has noted in 26 CFR ?1.863-1(c), the taxability of U.S. sources are set forth in 26 CFR ?1.861-8 through -14T. In those regulations, you will find everything disclosed about the specific applicability to residents, non-residents, foreign corporation, citizens and domestic corporations.”

WorldNetDaily checked with two of the big five national accounting firms. Interestingly, a spokesman for Arthur Andersen in New York said that David Cay Johnston from the New York Times also called his firm inquiring about the same subject, but they did not want to comment to either publication on the issue for “unspecified reasons.”

Martin Nissenbaum, national director of personal income tax planning at Ernst and Young in New York, told WorldNetDaily that Section 861 of the code is a definitional section about sources of income within the United States.

“It clearly applies to non-residents who earn income in the United States,” he said. “861 … I don’t really see the relevance to someone who is resident in the United States.”

Another leading proponent of the “U.S. sources” argument, Larken Rose, told WorldNetDaily he first heard about the argument from Bell’s work and subsequently spent hundreds of hours doing his own research, which is available in a report online. Also on his website are transcripts of examination meetings with the IRS where Rose confronted the agency over the issue in an attempt to get a technical opinion from the national office.

“861 and its regulations describe all situations in which ‘income from sources within the United States’ is taxable for citizens, foreigners, foreign and domestic corporations, etc.,” explained Rose. “However, the regulations still on the books are a bit behind the times regarding all the mangled possessions rules in the statutes, 26 USC ? 931 and following. But for most of us, that makes no difference, and it shows that the section applies in determining domestic taxable income, for anyone.”

Ernst and Young’s Nissenbaum disagreed.

“I’m pretty sure when this gets to a court they will throw this right out,” he stated. “They will argue this is frivolous and they will probably be penalized as well. I would not be surprised. I just don’t see the argument. Again, 861 only says this is how you figure out where income is from, but the rules in this section only apply for purposes of certain other sections, and none of those sections apply to someone who is resident in the United States. Someone who is resident in the United States is taxable on all their income worldwide, regardless of the source.”

Nevertheless, using the “U.S. sources” argument and strategies he developed, Bell electrified the tax-resistance movement after posting at NITE’s website a string of its members’ successes over the last year and a half, starting with a case of employment tax refunds to a company called Bosset Partners Marketing.

“The first great success which appears to have shaken the IRS and the New York Times to their foundations is the 941 correction and refunds for Bosset Partners Marketing, Inc., which used to be in Clearwater, Fla. This was the first time an employer came to me and said that they wanted to implement the strategy that I had been using for individuals, but in this case, we would be zeroing out 941 employment tax returns.

“This was only being done as there was a $100,000-plus employment tax debt to hang over this individual’s head, and if employers do not know, they need to know that this kind of debt is not dischargeable in any bankruptcy.

“The whole story is on the web at NITE.org, but I must say when I was asked to do this, I really was concerned and grilled Mr. Bosset on his certainty. I had no clue how the IRS was going to react. Instincts and reason told me that if we removed the testimony of the employer, then the IRS would zero out things in their computers, this man’s issues would be settled, the workers would get refunds of withheld money, and they would all disappear from the record as [if] a return was received and the amounts were corrected down to zero. This would leave nothing to trigger the program in the IRS computer.

“Doing this was like being asked to test the first Atom Bomb,” concluded Bell.

Since then, present and former members of NITE have been knocking boldly on the door of the IRS with the law, regulations and IRS forms in hand to say their “remuneration” is not taxable — and some are getting their money back from previous years.

Bell thinks the “U.S. sources” argument has the powers-that-be worried. He said it was as though somebody flipped a switch, and suddenly New York Times reporter David Cay Johnston was on a crusade to discredit the argument before there is any discussion of the substance of the regulations that NITE cites.

Playing right into the media’s hands, Bell continued, is the newly resurgent tax-resister movement. He said leaders of the movement have hijacked the “U.S. sources” argument and are fatally promoting it alongside failed tax-protester ideas.

“They then stumble before the court of public opinion when asked simple questions about it on national television,” he said.

“Having the media focus on confused and uninformed spokesmen should do wonders for the establishment’s efforts to kill this legal argument long before the actual substance is revealed to the American people. It’s the only weapon that can be formed against the letter of the law,” observed Bell.

According to Bell, the IRS and the courts had a field day in the past destroying tax protesters who claimed the tax laws are illegal or who use constitutional arguments. But, he said, now people are embracing the tax law and regulations as they are written. They are filing the proper forms, and are insisting on being afforded the many recently discovered avenues of administrative due process that are due them if they run into resistance. This has brought a renaissance of meaningful communication with certain elements of government, he said, and ever greater success under the letter of the law and established IRS procedures.

To end this golden age, Bell said, the IRS finds itself in the awkward position of having to deny the applicability of Treasury regulations as well as deny the many lawfully prescribed avenues of due process available to citizens. In essence, he says, the shoe is on the other foot now. The IRS is on the wrong side of the law and hasn’t yet figured out what to do about it, other than begin to use the media to poison the issue in the minds of the public.

So, what actions do NITE members take once they are convinced their income is not taxable?

Bell said his strategy is to make “contentions of a factual nature.”

Taking the example of an employee, Bell said that if a worker is convinced, after studying the law, that he did not earn any taxable income, he must refute the evidence the IRS holds that says he did indeed earn taxable income. That evidence is a W-2 or 1099 form provided to the IRS by the employer who assumed the income was taxable.

“You would use the 4852 form to argue that the W-2 and 1099 forms issued to you are in error, and the 8275 form to show the IRS how your legal position is constructed upon the regulations of the secretary of the Treasury.

“There isn’t any reason for people not to file anymore,” Bell explained, “especially since the U.S. Supreme Court has stated in U.S vs. Sullivan in 1927 that you must file if the government believes that you must, that in your filing you can make your argument. If that was not enough, we add the fact that the secretary of the Treasury has created the form 4852 for you to make contentions of factual nature and that he has created the 8275 form so that you can show how your position concurs with his regulations.”

Some people get refunds at that point. But what if the IRS ignores a person’s contentions?

“The Sixth Amendment gives you the right to confront and cross-examine the adverse government witnesses against you as required by the U.S. Supreme Court in Goldberg vs. Kelly in 1970. You could prove the W-2 forms to be specious hearsay, as the person responsible for the W-2s never read the whole of the applicable law regarding ‘gross income’ and ‘wages’, and you would thus undermine the veracity of these reports,” Bell said.

“That should prove the W-2 claims of gross income to be hearsay and help you strike them from the administrative record and support your claims of no gross income. The plan is simple: Either eliminate the witnesses’ credibility before the IRS and the law, or eliminate the evidence provided by the witness by convincing the employer to stop reporting and to correct prior reports.”

Several employers, like Jesson, are doing just that. They have stopped reporting to the IRS that they paid any taxable gross income to their workers, and they are correcting past reports they made about their employees.

How does all this differ from the “tax resisters”?

Explained Bell: “The tax resistance industry takes the general slant that the tax laws are illegal, and they will not use the IRS process or forms. Therefore, they will not even try to exhaust the administrative due process and remedy provided for by the Internal Revenue laws. This must be done in order for the individual to have any standing before the court regarding any claims, as the federal courts have long held that you must exhaust administrative remedy before you can seek judicial remedy. Thus, the tax resistance industry is doing the people who trust it the greatest disservice, as their arguments do not give the followers any means of judicial remedy or cause of action under the law.”

Bell said the IRS has a long way to go in the due process department.

“There are about 15 manifestations of our due process of law before the IRS. They can be found in the Bill of Rights, the public laws of the Congress, the statutes, regulations, U.S. Supreme Court rulings and the Internal Revenue Manual.

“Mostly, the IRS completely violates the process by skipping over the pre-examination, examination and appeal process and rushing straight to collections. Since every step of the process is set forth by either the statutes, regulations, and/or the Internal Revenue Manual, and the Internal Revenue Reform and Restructuring Act of 1998 now requires the IRS to comply with even the manual as if it is law, the claim of denial of due process of law has become a very powerful point that appears to get congressional attention when we are willing to push it.

“In the 1976 case of Shapiro vs. CIR, the federal courts held that when the IRS violates its procedures, you can sue the IRS to keep them from taking your property.”

Bell said there is a little-known IRS department that is supposed to help taxpayers. That department needs to be pressured to do its job, he said.

“It is called the Taxpayers Advocate Service. They were given new broad and expansive powers pursuant to the Internal Revenue Service Reform and Restructuring Act of 1998. They have local offices that are supposed to help and investigate the procedural due-process violations asserted by citizens. This is clearly seen in 26 USC ?7811, but the local offices do not even know that such a law exists.

“The national office is no better, as Ms. Gayle Harris — a representative from the National TAS who is the liaison to the Senate Finance Committee and who is supposed to look into claims of IRS procedural violations — told me that the statutory requirement that says they must investigate the charges of the citizens is ‘debatable’ and a ‘personal opinion.’ In the article LAW 101 at NITE.org, there is over 100 years of federal statutory construction case law, which appears to greatly disagree with Ms. Harris.”

Bell said NITE travels to Washington, D.C., to help its members obtain congressional assistance.

“We are going to specific senators’ and congresspeoples’ offices, showing their staff that we have tried to communicate with the IRS, which has been completely futile, as the IRS only sends out off-point form letters designed for people who challenge the constitutionality of the income tax and will not investigate the up to 24 procedural violations per case that we have identified.

“We are trying to get their help in forcing the IRS to have a dialogue with us on the issues of procedure and rights, which will lead us to confronting and cross-examining the witnesses on the administrative record and asking them if they applied the U.S. source rules as required by the secretary of the Treasury. I would just love to see people all over America in case after case before the IRS reveal that the employer and payer reports made against them were made without regard for the actual letter and application of the law.”

Bell concluded: “Gradually, with time, as the right amount of social and political pressure is created by numbers of us insisting on the letter of the law in tax procedures, the idea of the people being entitled to 100 percent of the fruits of their labor will be a widespread mindset.”

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