The 1040 Instructions Say...

There is law that requires government agencies to publish their structure, organization, and procedural rules. What follows is from the Code of Federal Regulations. (CFR)

26 CFR 601.602

Subpart F_Rules, Regulations, and Forms

Sec. 601.602 Tax forms and instructions.

(a) Tax return forms and instructions. The Internal Revenue Service develops forms and instructions that explain the requirements of the Internal Revenue Code and regulations. The Service distributes the forms and instructions to help taxpayers comply with the law. The tax system is based on voluntary compliance, and the taxpayers complete and return the forms with payment of any tax owed.
(b) Other forms and instructions. In addition to tax return forms, the Internal Revenue Service furnishes the public copies of other forms and instructions developed for use in complying with the laws and regulations. These forms and instructions lead the taxpayer step-by-step through data needed to accurately report information required by law.

In case you didn't get the point of the highlighted words:

1. The IRS develops instructions that explain the requirements of the tax law.
2. The instructions are to help the taxpayer comply with the tax law.
3. The instructions lead the taxpayer "step-by-step" through the data needed to accurately report information required by the tax law.

• If this is correct, would such instructions omit telling you to supply data that the law requires?

On page 19 of the year 2010 Form 1040 instruction booklet you will find this instruction:

Income
Foreign-Source Income
You must report unearned income, such as interest, dividends, and pensions, from sources outside the United States unless exempt by law or a tax treaty. You must also report earned income, such as wages and tips, from sources outside the United States.

The cited words are in the step-by-step instructions, right after the instructions for line 6, and just before the instructions for line 7. These words are the same in every 1040 instruction booklet I have read.

• This is an instruction regarding what is required to be reported on the 1040.
• Would such instructions omit telling you to supply data that the law requires?

In every Form 1040 instruction booklet I have looked at, there are no words stating: 'You must report earned income, such as wages and tips, from sources INSIDE the United States.'

• The step-by-step instructions for complying with the law do NOT say to report earned income from sources INSIDE the United States.
• If the law requires you to report earned income from sources INSIDE the United States, wouldn't the IRS be remiss (negligent) if the instructions failed to state, 'You must report earned income, such as wages and tips, from sources INSIDE the United States'?

Just as you should not read into the law, that which is not there; You should not read into the official instructions for complying with the law, that which is not there.

Stating the obvious:

• Law must specify who and what it applies to.
• If the law doesn't specify that it applies to your property, then it doesn't apply to your property.
• If the instructions for complying with the law do not state that the law applies to your property, then it doesn't apply to your property.
• If the instructions for complying with the law do not state that you are required to report income earned from sources INSIDE the United States, then you do not have to report income earned from sources inside the United States.

On page 94 of the 2010 instructions you will find the Disclosure, Privacy Act, and Paperwork Reduction Act Notice. It states:

Our legal right to ask for information is Internal Revenue Code sections 6001, 6011, and 6012(a), and their regulations. They say that you must file a return or statement with us for any tax you are liable for.

This is also an instruction on how to comply with the income tax law.

• This instruction states that you are required to file a return for any (income) tax you are "liable" for.
• This instruction does NOT state that you are required to file a return or statement for any (income) tax you are NOT liable for.

It is an instruction in accordance with this law:

26 CFR 31.6011 (a)-10

§ 31.6011 (a)-10   Instructions to forms may waive filing requirement in case of no liability tax returns.

Notwithstanding provisions in this part which require that a tax return be filed, the instructions to the form on which a return of tax is otherwise required by this part to be made may waive such requirement with respect to a particular class or classes of no liability tax returns. Returns in a class for which such requirement has been so waived need not be made.

This Treasury decision is not adverse to any taxpayer. For this reason, it is found unnecessary to issue this Treasury decision with notice and public procedure under subsection (b) of section 553 of title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.

[T.D. 8229, 53 FR 35811, Sept. 15, 1988]

I will specifically address the issue of income tax "liability" on a following page.

On page 8 of the year 2010 instruction booklet is a chart for determining if you are required to file a Form 1040 dependent upon whether your "gross income" is above the specified threshholds for each category. "Gross income" is annotated with a footnote which states:

**Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home [...]

This is also an instruction on how to comply with the income tax law.

• "Gross income means all income" ... "that is not exempt from tax".
• Therefore, gross income does NOT mean income that IS exempt from tax.
• Therefore such exempt income has no bearing upon the requirement to file.

Also:

• You have just been notified that some type of "income" is exempt from tax. 

This is the law that defines exempt income.

Title 26 - Internal Revenue.
SUBCHAPTER A - INCOME TAX
PART 1 - INCOME TAXES.  - Tax Based on Income from Sources within Or Without the United States.

§ 1.861-8T
Computation of taxable income from sources within the United States and from other sources and activities (temporary).

(d) Excess of deductions and excluded and eliminated items of income.
(2) Allocation and apportionment to exempt, excluded or eliminated income—
(ii) Exempt income and exempt asset defined—(A) In general. For purposes of this section, the term exempt income means any income that is, in whole or in part, exempt, excluded, or eliminated for federal income tax purposes. The term exempt asset means any asset the income from which is, in whole or in part, exempt, excluded, or eliminated for federal tax purposes.

Stating the obvious:

• Income that is exempt for federal income tax purposes:
  • Is exempt from taxation.
  • Does not need to be reported.
  • Does not count in determining whether a 1040 form must be filed.

And this is the income that is not exempt from tax:

Title 26 - Internal Revenue.
SUBCHAPTER A - INCOME TAX
PART 1 - INCOME TAXES.  - Tax Based on Income from Sources within Or Without the United States.

§ 1.861-8T
Computation of taxable income from sources within the United States and from other sources and activities (temporary).

(d) Excess of deductions and excluded and eliminated items of income.
(2) Allocation and apportionment to exempt, excluded or eliminated income—

(iii) Income that is not considered tax exempt. The following items are not considered to be exempt, eliminated, or excluded income and, thus, may have expenses, losses, or other deductions allocated and apportioned to them:
(A) In the case of a foreign taxpayer (including a foreign sales corporation (FSC)) computing its effectively connected income, gross income (whether domestic or foreign source) which is not effectively connected to the conduct of a United States trade or business;
(B) In computing the combined taxable income of a DISC or FSC and its related supplier, the gross income of a DISC or a FSC;
(C) For all purposes under subchapter N of the Code, including the computation of combined taxable income of a possessions corporation and its affiliates under section 936(h), the gross income of a possessions corporation for which a credit is allowed under section 936(a); and
(D) Foreign earned income as defined in section 911 and the regulations thereunder (however, the rules of § 1.911-6 do not require the allocation and apportionment of certain deductions, including home mortgage interest, to foreign earned income for purposes of determining the deductions disallowed under section 911(d)(6)).

Clarifying the obfuscation:

• Income that is exempt means income that is not taxable.
• Income that is not exempt means income that is not, not taxable.
• Double negatives cancel.
• Income that is not exempt means income that is taxable.

Oh what a tangled web we weave, When first we practice to deceive.
Attributed to Sir Walter Scott.

Not only is this mealy-mouthed law written to deceive, the path through the body of law to find this particular law is convoluted. The history of the prior incarnations of this law evidence a deliberate attempt to hide the truth. (This might explain why you never knew about this until now.)

Restating the obvious:

• Law must specify who and what it applies to.
• The law specifies that it applies to foreign earned income of U.S. Citizens.
  • The law does NOT specifiy that it applies to domestic earned income of U.S. Citizens.
• The 1040 instructions specify that income earned from sources outside the United States must be reported.
  • The 1040 instructions do NOT specify that income earned from sources inside the United States must be reported.
• This law, and the Form 1040 instructions are in agreement on this issue.
• If the law doesn't specify that it applies to your income earned from sources inside the United States, then it doesn't apply to your income earned from sources inside the United States.
• If the 1040 instructions don't specify that you report your income earned from sources inside the United States, then you are not required to report your income earned from sources inside the United States.

The IRS can only collect tax on income it knows about. If the law does not require information about certain compensation to be reported to the IRS, then it must follow that the IRS is not required to collect tax on that compensation.

The truth IS as simple as shown on this page. 

You can get your verification copy of the 2010 form 1040 instruction booklet from the IRS website: www.irs.gov 1.4 mb.

Other years can be downloaded from the IRS.GOV website. These files are all bigger than 1.0 mb.