Ref: Back-up Withholding
The possibility of the IRS requesting back-up withholding on my invoices is fairly certain. With that in mind I have taken the time to research the legal background of this process. The Family Guardian web site and Tax-Freedom.com has been a source of information on this subject. To begin with back-up withholding finds its legal foundation in Title 26, Subtitle C, Chapter 24, section 3406. Subtitle C deals with Employment Taxes;
TITLE 26—INTERNAL REVENUE CODE
Subtitle A —Income Taxes
Subtitle B —Estate and Gift Taxes
Subtitle C —Employment Taxes
Subtitle D —Miscellaneous Excise Taxes
Subtitle E —Alcohol, Tobacco, and Certain Other Excise Taxes
Subtitle F —Procedure and Administration
Subtitle G —The Joint Committee on Taxation
Subtitle H —Financing of Presidential Election Campaigns
Subtitle I —Trust Fund Code
Subtitle J —Coal Industry Health Benefits
Subtitle K —Group Health Plan Requirements
For an individual to be included in the provisions of this subtitle they must be an employee. Now when a word is used in a statute and the meaning is not the same as commonly understood, it is deemed to be a “legal term” and must be defined in the law. This is the case for the word “employee”. The definition for this legal term is found in chapter 24 of Subtitle C, in section 3401 (c), “Definitions”.
For purposes of this chapter, (meaning Chapter 24) the term “employee” includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term “employee” also includes an officer of a corporation.
The critical term used in the definition of employee, is the word “includes”. Now the term “includes” can be a term of enlargement or one of limitation. In reading the definition in context, however, the term is one of limitation. If it was otherwise it would have been written “also includes”. (Black’s Law Dictionary, 6th ed.)
When reading the language of Subtitle C, and the word “employee” is used one must refer to the definition at section 3401(c). It is plain that I do not meet the description of “employee” used here. I am not an “officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. …” Nor am I an “officer of a corporation.”
Subtitle C, deals with the relationship between an “employer” (defined at §3401(d)) and an “employee” and the tax imposed upon that relationship. This relationship within the federal family is one of “privilege” and is therefore a “taxable” activity. I also do not receive “wages” as that legal term is also defined at §3401(a);
For purposes of this chapter, the term “wages” means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer,….
This being the case, none of the sections dealing with employment taxes has a bearing on my person or property. The laws and regulations contained in Subtitle C again deal with an “employee” as defined at 3401(c)
A second point supporting the fact that any back-up withholding requests made by the IRS against my property are misapplied, is in the language of section 3406 of subtitle C;
3406. Backup Withholding
(a)Requirement to deduct and withhold.
(1) In general. in the case of any reportable payment, if –
(A) the payee fails to furnish his TIN to the payor in the manner required,
(B) the Secretary notifies the payor that the TIN furnished by payee is incorrect,
(C) there has been a notified payee under-reporting described in subsection (c), or
(D) there has been a payee certification failure described in subsection (d), then the payor shall deduct and withhold from such payment a tax equal to 31 percent of such payment.
(2) Subparagraphs (c) and (d) of paragraph (1) apply only to interest and dividend payments.
Subparagraphs (C) and (D) of paragraph (1) shall apply only to reportable interest or dividend payments. …..
If the IRS tries to back-up withhold from wages paid by an employer, they must have one of the explicit causes set forth in the statute present as justification for such attempt. Those causes are found in §3406(a)(1)(A) and (B) cited above. I do not believe that I have furnished you with an incorrect SSN. I am not aware of where you obtained the SSN which the IRS inquired about. I back-checked my W-2s for 2006 and 2007, my SSN was correct. In any case section 3406 has no legal implications as it deals with employees defined at 3401(c) and applies to taxes imposed upon federal employment and not Subtitle A income.
An interesting side note, that while researching the IRS form 1099, I came across the requirements in the Code of Federal Regulations for the W-2;
Revised as of April 1, 2009
From the U.S. Government Printing Office via GPO Access
TITLE 26–INTERNAL REVENUE
CHAPTER I–INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
Returns and Records–Table of Contents
Sec. 1.6041-2 Return of information as to payments to employees.
(a)(1) In general. Wages, as defined in section 3401, paid to an employee are required to be reported on Form W-2. See section 6011 and the Employment Tax Regulations thereunder….
It is a real paper chase but referring back to the definition of “wages” at 3401, cited previously, “wages” are that which are paid to an “employee” as defined at 3401(c), occupations of privilege. It is weird, but it seems that our very “up-front” and “honest” federal government is collecting an “employment (privilege) tax” in the private sector and making us think that it is an Income Tax.