rr-04-31.pdf

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Part I – 1986 Code

Section 61

Rev. Rul. 2004-31

PURPOSE

The Service is aware that some individuals are attempting to reduce their federal
income tax obligations by claiming that they have been “removed” or “redeemed” from
the federal tax system. Although the specific arguments made by these individuals
vary, some argue that the Government commits a fraud when it attempts to collect
debts, including tax debts, and that this purported fraud allows individuals to
“chargeback” debts that the Government purportedly owes to these individuals to
eliminate any asserted tax liability. “Removal,” “redemption,” and “chargeback”
schemes are referred to here collectively as “removal schemes” and “removal
arguments.” Some promoters are marketing a package, kit, or other materials that
claim to show individuals how they can avoid paying income taxes based on these and
other meritless arguments.

This revenue ruling emphasizes to individuals, and to promoters and return
preparers who assist individuals with these schemes, that there is no authority under
any U.S. law that supports the argument that an individual can be “removed” or
“redeemed” from the federal tax system to avoid tax liabilities or that an individual can
satisfy debts, including tax liabilities, by making “chargeback” or other similar
arguments. Removal and redemption arguments have no merit and are frivolous.

The Service is committed to identifying individuals who attempt to avoid or evade
their tax obligations. The Service will take vigorous enforcement action against these
taxpayers and against promoters and return preparers who assist taxpayers in taking
these frivolous positions. Frivolous returns and other similar documents submitted to
the IRS are processed through the Service’s Frivolous Return Program. As part of this
program, the Service confirms whether taxpayers who take frivolous positions have filed
all of their required tax returns, computes the correct amount of tax and interest due,
and determines whether civil and criminal penalties should apply. The Service also
determines whether civil or criminal penalties should apply to return preparers,
promoters, and others who assist taxpayers in taking frivolous positions, and
recommends whether a court injunction should be sought to halt such activities. Other
information about frivolous tax positions is available on the Service website at
www.irs.gov
.

DISCUSSION OF REMOVAL AND REDEMPTION ARGUMENTS AND SCHEMES

Removal arguments and schemes are loosely related and take a variety of
different forms. Proponents of removal arguments and schemes typically claim, even
though they remain citizens or residents of the U.S., that they are not required to file
federal tax returns and pay their tax obligations because they have been removed or
redeemed from the federal tax system. As a result of participating in removal schemes,
these individuals do not file required returns or pay the income tax that they owe.

In some variations of the removal argument, individuals claim that the
Government commits a fraud when it attempts to collect debts, including tax debts, and
that this purported fraud allows individuals to “chargeback” debts that the Government
purportedly owes to these individuals to eliminate any liability to the Government. In
other variations, individuals argue that Federal Reserve notes, or “paper money,” are
not legal tender and that the Government has been wrongfully using taxpayers and their
labor as security for the Government’s obligations. Other individuals argue that they
may reclaim, or “chargeback,” their own value from the Government as a result of the
Government’s wrongful conduct and then use that value to pay the individuals’ debts.
Participants in removal schemes often attempt to offset, collect or “redeem” their
asserted claims against the Government by using or filing liens, bills of exchange, and
various Uniform Commercial Code (UCC) forms, or by relying on misinterpretations of
federal laws and the Uniform Commercial Code.

Participants in the removal schemes may rely on one or more of the following
erroneous arguments, alleged facts or actions to support their frivolous claims: (a) the
bankruptcy of the United States occurred contemporaneously with the creation of the
Federal Reserve, the start of the Great Depression, the removal of the United States
from the gold standard, or the passage of House Joint Resolution 192 (claimed to be a
declaration of bankruptcy); (b) the Government’s use of birth certificates of taxpayers as
registered securities; (c) the filing of documents with variations on a taxpayer’s name,
(
e.g.
, using all capital letters in some documents and standard capitalization in others)
creates a “straw man” or “nom de guerre” as the debtor to the Government that replaces
the individual who has removed himself from the Government’s jurisdiction; (d) the
“redemption” of debts from the Government by filing UCC forms, such as the UCC-1
form; (e) the submission of documents to the U.S. Secretary of the Treasury to establish
a fictitious bank account (sometimes referred to as a “Treasury Direct Account”) where
the value of charged back debts is located; (f) the practice of “accepting for value”
official Government documents and the “charging back” of those documents by
responding to them with a “private notice” that may include a “Treasury Direct Account
Number,” a “Memory of Account Number” or a “Posted Certified Account Number”; and
(g) the use of “Bills of Exchange,” Form UCC-3 and “Sight Drafts” to discharge debts to
the Government. This list is not exclusive, however. Participants in removal schemes
also make other equally frivolous arguments.

Instead of filing federal income tax returns with the Service, participants in
removal schemes frequently send documents and other correspondence to the Service
and other Government agencies. Examples of these documents include: improperly
filed Forms 1040-ES, Estimated Tax for Individuals, reporting the location of the funds in

a fictitious bank account from which the IRS can collect taxes; improperly filed Fiduciary
Tax Returns; improperly filed Forms 8300, Report of Cash Payments Over $10,000
Received in a Trade or Business, reporting that a person or entity has “charged back“
after “accepting for value” the Government’s documents; improperly filed Forms W-9,
Request for Taxpayer Identification Number and Certification, to obtain a social security
or employee identification number of a person or entity to include on the Form 8300;
“commercial affidavits” in lieu of tax returns stating that the filer is a secured party and
has no income for a particular year; and documents and correspondence to “accept for
value” IRS notices of tax liens and levies to have the tax balances paid from the filer’s
“Treasury Direct Account.”

There is no authority under any U.S. law that supports the claim that individuals
may avoid their federal income tax obligations based on removal arguments such as
those described in this revenue ruling. Similarly, there is no authority under any U.S.
law that supports the claim that requiring payment of a debt owed to the Government by
commercially acceptable means amounts to a fraud by the Government. Section 61 of
the Internal Revenue Code provides that gross income includes all income from
whatever source derived, including compensation for services. Adjustments to income,
deductions, and credits must be claimed in accordance with the provisions of the
Internal Revenue Code and the Treasury regulations thereunder and other applicable
federal law. Section 6011 provides that any person liable for any tax imposed by the
Internal Revenue Code shall make a return when required by Treasury regulations, and
that returns must be in accordance with Treasury regulations and IRS forms. Section
6012 identifies the persons who are required to file income tax returns. Section 6151,
except as specifically provided, requires that taxpayers pay their tax when the return is
due. Section 6311 requires payment of taxes by commercially acceptable means as
prescribed by Treasury Regulations.

Courts repeatedly have rejected removal arguments and other similar arguments
as frivolous and have penalized taxpayers who make these types of arguments.
See
,
e.g., United States v. Sloan, 939 F.2d 499, 500 (7
th
Cir. 1991) (affirming criminal
conviction for tax evasion and rejecting "wholly defective" arguments that the federal tax
laws did not apply to taxpayer because he was a "freeborn, natural individual, a citizen
of the State of Indiana, and a ‘master’ - not – ‘servant’ of his Government”);
United
States v. Condo, 741 F.2d 238, 239 (9
th
Cir. 1984) (affirming criminal conviction for tax
fraud and rejecting as “frivolous” the argument that Federal Reserve Notes are not valid
currency, cannot be taxed, and are merely "debts”);
United States v. Rickman
, 638 F.2d
182, 184 (10
th
Cir. 1980) (affirming criminal conviction for willfully failing to file a return
and rejecting the taxpayer’s argument that "the Federal Reserve Notes in which he was
paid were not lawful money within the meaning of Art. 1, § 8, United States
Constitution").

Although individuals who rely on these removal arguments generally do not file
federal income tax returns with the Service, some individuals also are relying on
removal or similar frivolous arguments to claim that they can reduce or eliminate their

tax by filing tax returns in which they report zero income and tax liability. See Rev. Rul.
2004-34, I.R.B. 2004-12 (3/22/2004), for a discussion of this frivolous position.

CIVIL AND CRIMINAL PENALTIES

The Service will challenge the claims of individuals who attempt to avoid or
evade their federal tax liability by refusing to file returns and pay tax on the basis that
they have been removed or redeemed from the federal tax system. In addition to
liability for the tax due plus statutory interest, individuals who fail to file and pay tax or
who claim refunds based on this or any other frivolous arguments face substantial civil
and criminal penalties. Potential civil penalties include: (1) the section 6651(f) penalty
for fraudulent failure to file, which is up to 75 percent of the amount of taxes the
taxpayer should have reported on the return ; (2) the section 6651(a)(1) penalty for
failure to file, which is equal to up to 25 percent of the amount of taxes the taxpayer
should have reported on the return; (3) the section 6651(a)(2) penalty for failure to pay,
which is equal to .5 percent of the tax for each month or fraction of a month the tax
remains unpaid, not to exceed a total of 25 percent; and; (4) a penalty of up to $25,000
under section 6673 if the taxpayer makes frivolous arguments in the United States Tax
Court.

Individuals relying on this scheme also may face criminal prosecution for: (1)
attempting to evade or defeat tax under section 7201 for which the penalty is a fine of
up to $100,000 and imprisonment for up to 5 years; (2) willful failure to make a return or
pay tax under section 7203 for which the penalty is up to $25,000 and imprisonment of
up to 1 year, or (3) making false statements under section 7206 for which the penalty is
a fine of up to $100,000 and imprisonment for up to 3 years.

Persons who promote this scheme and those who assist taxpayers in claiming
tax benefits based on this scheme also may face penalties. Potential penalties include:
(1) a $250 penalty under section 6694 for each return prepared by an income tax return
preparer who knew or should have known that the taxpayer’s argument was frivolous
(or $1,000 for each return where the return preparer’s actions were willful, intentional or
reckless); (2) a $1,000 penalty under section 6701 for aiding and abetting the
understatement of tax; and (3) criminal prosecution under section 7206 for which the
penalty is a fine of up to $100,000 and imprisonment for up to 3 years for assisting or
advising about the preparation of a false return or other document under the internal
revenue laws. Promoters and others who assist taxpayers in engaging in these
schemes also may be enjoined from doing so under section 7408.

HOLDING

Individuals may not avoid or evade their tax liability by refusing to file returns and
pay tax on the basis that they have been removed or redeemed from the federal tax
system or by claiming that they can “chargeback” their debts to the Government.
Arguments that individuals may be removed or redeemed from the federal tax system or
may “chargeback” their debts to the Government have no merit and are frivolous.

Individuals who attempt to reduce their federal tax liability by taking frivolous positions
based on these arguments will be liable for the actual tax due plus statutory interest. In
addition, the Service will determine civil penalties against individuals where appropriate,
and those individuals may also face criminal prosecution. The Service also will
determine appropriate civil penalties against persons who prepare frivolous returns or
promote frivolous positions, and those persons may also face criminal prosecution.
Promoters and others who assist taxpayers in engaging in these schemes also may be
enjoined from doing so under section 7408.

DRAFTING INFORMATION

This revenue ruling was authored by the Office of Associate Chief Counsel
(Procedure and Administration), Administrative Provisions and Judicial Practice
Division. For further information regarding this revenue ruling, contact that office on
(202) 622-4940 (not a toll-free call).