Lawfully Avoiding Backup Withholding under 26 U.S.C. §3406
1. Introduction
Those who claim to be “nonresident aliens” not engaged in a “trade or business” are sometimes subjected to unlawful backup withholding by ignorant financial institutions and private employers who refuse to read and obey the law as written. This section will provide tools and procedures to fight such forms of involuntary servitude and THEFT under the color of law.
The IRS website contains the following articles on Backup withholding:
- Backup Withholding
https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding - Fast facts to help taxpayers understand backup withholding
https://www.irs.gov/newsroom/fast-facts-to-help-taxpayers-understand-backup-withholding - Backup withholding “B” Program
https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding-b-program - Backup withholding “C” Program
https://www.irs.gov/businesses/small-businesses-self-employed/backup-withholding-c-program
2. Summary of Backup Withholding Requirements
Below is a summary of the requirements for backup withholding:
- The definition of “wages” in 26 U.S.C. §3401(a) describes them as:
“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, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include remuneration paid—”.
1.1. If you aren’t an “employee” 26 U.S.C. §3401(c) as most people aren’t, then you can’t therefore earn “wages“. That “employee” works for Uncle Sam and is lawfully elected or appointed under 5 U.S.C. §2105.
1.2. Filing a W-4 under 26 U.S.C. §3401(p) as a private worker also doesn’t MAKE you a STATUTORY “employee” under 26 U.S.C. §3401(c) either, because what you earn does not fall in the definition of “specified federal payment” that would be eligible for such an election. In fact, doing so is the crime of impersonating a public officer in violation of 18 U.S.C. §912. - The definition of “gross income” in 26 U.S.C. §61 does NOT include earnings from your own labor. The closest thing is “compensation for services”, but that term is only defined in the context of Railroad retirement in 26 C.F.R. §31.3121(e)-1. So you don’t earn “compensation for services” and therefore your earnings from labor are not includible in “gross income“. If your earnings from labor aren’t taxable as “gross income”, then why even report them or withhold income tax on them, other than of course to FOOL you into donating them to a public use by “effectively connecting” them?:
https://famguardian.org/TaxFreedom/CitesByTopic/CompensationForServices.htm - Only done by “employers”, because it comes under Subtitle C: Employment Taxes. Recipients of the payments must therefore be EMPLOYEES, not ordinary business associates or customers of financial institutions.
3.1. It therefore appears to be relate to reporting and withholding on fringe benefits received in connection with “employment” WITHIN the “United States” federal corporation that is therefore connected with a “trade or business”/public office.
3.2. There is no such thing as “employment” outside the government of the “United States” per
3.2.1. 26 C.F.R. §31.3401(a)(6)-1(b) in the case of income tax.
3.2.2. 26 C.F.R. §31.3121(b)-3(c)(1) in the case of Social Security.
3.2.3. The definition of “employee” in 26 U.S.C. §3401(c), which means a government worker only.
3.3. They want you to mistakenly BELIEVE that the “United States” they are talking about is the GEOGRAPHICAL “United States” but we have seen NO evidence which would prove this and PRESUMPTION about what it means is a violation of due process. - Required by:
4.1. 26 U.S.C. §3406.
4.2. 26 C.F.R. §31.3406-0 through 26 C.F.R. §31.3406(j)-1. - Withholding set at 24% of “reportable payments”. See 26 C.F.R. §31.3406(a)-1(a).
- “reportable payments” are payments connected with a trade or business of the PAYER, not the PAYEE, which means a public office in the government, pursuant to:
6.1. 26 U.S.C. §3406(b).
6.2. 26 U.S.C. §6041. All information returns filed or reported must be connected with a “trade or business” as required by paragraph (a) of this section. The PAYOR is the one engaged in the “trade or business” and not the PAYEE. That means only government entities exercising “the functions of a public office” can lawfully report.
6.3. 26 U.S.C. §6049 in the case of interest payments
6.4. 26 U.S.C. §6042 in the case of dividend payments
6.5. 26 U.S.C. §6044 in the case of patronage dividends - None of the regulations talk about the “trade or business” requirement. It is ONLY found in 26 U.S.C. §6041(a), which is where the obligation to report is established.
- Backup withholding is specifically prohibited:
8.1. On reportable payments that qualify for the documentary evidence rule found in 26 C.F.R. §1.6049–5(c)(1) or (4).
8.2. For amounts already subject to withholding of 30%. - Amounts withheld are “treated as if they were wages paid by an employer to an employee (and amounts deducted and withheld under this section shall be treated as if deducted and withheld under section 3402).” This means they are subject to the SAME restrictions as “wage” reporting and withholding:
26 U.S. Code § 3406 – Backup withholding
(h)Other definitions and special rules
(10)Coordination with other sections
For purposes of section 31, this chapter (other than section 3402(n)), and so much of subtitle F (other than section 7205) as relates to this chapter, payments which are subject to withholding under this section shall be treated as if they were wages paid by an employer to an employee (and amounts deducted and withheld under this section shall be treated as if deducted and withheld under section 3402). - Since amounts are treated as “wages”, then In order to earn “wages”, those not acting as “employees” must make an election by filing a W-4 as identified in 26 U.S.C. §3402(p). If they never made such an election, amounts received therefore cannot be “wages” as indicated and it would be illegal and a FRAUD to withhold or report under this section or to treat the payment as being subject to backup withholding.
3. Avoiding Backup Withholding as a Nonresident Alien Member
There are three levels of equivocation one encounters in challenging backup withholding:
- Equivocating common law “employees” with STATUTORY “employees” under 26 U.S.C. §3401(c). You can be a PRIVATE “employee” without being a STATUTORY “employee”. The fact that “includes” is used in the definition of STATUTORY “employee” doesn’t mean that PRIVATE workers can be arbitrarily added. They have to be listed SOMEWHERE in the code to allow that, and they aren’t. Under the rules of statutory construction and interpretation, they are therefore purposefully EXCLUDED:
https://ftsig.org/special-language/includes-including/ - Equivocating “nonresident aliens” who are aliens with those who are nationals. Aliens throughout the COUNTRY are subject to backup withholding but nationals are not.
- Equivocating the LEGAL “United States” as a corporation with the GEOGRAPHICAL “United States”. The case of Brushaber v. Union Pacific Railroad only dealt with U.S. Source payments as those originating from federal corporations.
- Equivocating the two GEOGRAPHICAL “United States” with each other: the District of Columbia defined in the Code with the one defined in the Constitution. Constitutional “United States” withholding only deals with aliens. Federal zone “United States” only deals with corporations.
Before a payment can be subject to backup withholding under 26 U.S.C. §3406:
- You must CONSENT to actually BE an “employee” as defined. The following proves that you are NOT if you don’t consent:
PROOF OF FACTS: You’re Not the “Employee” mentioned in 26 U.S.C. 3401(c), FTSIG
https://ftsig.org/proof-of-facts-youre-not-the-employee-mentioned-in-26-u-s-c-3401c/ - You must be an “employee” through a lawful appointment or election in 5 U.S.C. §2105 and cannot unilaterally ELECT yourself into an “employee” status without criminally impersonating a public officer in violation of 18 U.S.C. §912. There is NO DIFFERENCE between “being treated AS IF you are an employee and actually BEING an employee” from a legal perspective.
- The earnings must be “reportable”, which means the “payor” must be engaged in the “trade or business”/public office franchise as required by 26 U.S.C. §6041. Private employers are NOT engaged in a “public office”, and certainly not within the United States federal corporation.
- The earnings must be a “U.S. Source” collected within the jurisdiction of the United States federal corporation in the above list. There is no such thing as “employment” outside the “United States****” (government) per:
4.1. 26 C.F.R. §31.3401(a)(6)-1(b) in the case of income tax.
4.2. 26 C.F.R. §31.3121(b)-3(c)(1) in the case of Social Security.
4.3. The definition of “employee” in 26 U.S.C. §3401(c), which means a government worker only. - The earnings must be paid by an “employer” to an “employee” WITHIN the “United States” government and not a private company. There is not such thing as “employment“, “employers“, or “employees” outside the United States federal corporation/government except by ELECTION which you as a private human or private company should never make and which no law PERMITS you to to make. This is consistent with the definition of “employee” in 5 U.S.C. §2105 and the fact that Social Security Numbers are issued only to “employees” under 20 C.F.R. §422.103 in connection with “employment“.
- If you do not or cannot lawfully CONSENT to treat your earnings as “wages” as required by 26 U.S.C. §3402(p) then you can’t therefore be subject to backup withholding or reporting.
6.1. What you earn except in rare cases does not satisfy the definition of “specified federal payment” in 26 U.S.C. §3402(p)(1)(C).
6.2. Thus even WITH your consent, you cannot elect to call your private earnings a “payment of wages by an employer to an employee” described in 26 U.S.C. §3402(p)(1)(A). It would be fraud to do so.
No authoritative caselaw we have seen helps with resolving the above forms of equivocation. It doesn’t seem necessary anyway given how clear the above is. This is a Third Rail Issue to maximize federal revenue. So you have to apply the above criteria to explain to your business associates that “backup withholding” doesn’t apply.
“Nonresident aliens” receiving payments from non-governmental entities cannot lawfully become the subject of backup withholding per item 3 above. If a financial institution or private employer indicates that they want to do it anyway we suggest:
1. 26 U.S.C. §3406 also authorizes backup withholding in the case of those who refuse to provide a TIN. The requirement to FURNISH a TIN is described in 26 C.F.R. §301.6109-1(b). Those who are “non-resident non-persons” as identified in that section are not listed as having a requirement. Neither are “nonresident alien individuals” who are NOT engaged in a “trade or business”. Therefore, by the rules of statutory construction, they are not required to deduct, withhold, or report.
“Expressio unius est exclusio alterius. A maxim of statutory interpretation meaning that the expression of one thing is the exclusion of another. Burgin v. Forbes, 293 Ky. 456, 169 S.W.2d. 321, 325; Newblock v. Bowles, 170 Okl. 487, 40 P.2d. 1097, 1100. Mention of one thing implies exclusion of another. When certain persons or things are specified in a law, contract, or will, an intention to exclude all others from its operation may be inferred. Under this maxim, if statute specifies one exception to a general rule or assumes to specify the effects of a certain provision, other exceptions or effects are excluded.”
[Black’s Law Dictionary, Sixth Edition, p. 581]
2. If the payer gives you guff when you say you don’t have to provide a TIN and are not eligible, give them the following:
Why It is Illegal for Me to Request or Use a “Taxpayer Identification Number”, Form #04.205 https://sedm.org/Forms/04-Tax/2-Withholding/WhyTINIllegal.pdf |
3. If the payer gives you guff about whether you are or can choose to be a “non-resident non-person”:
3.1. Show them the Affidavit of Citizenship, Domicile, and Tax Status, Form #02.001, which proves that you are a “nontaxpayer” who doesn’t need to withhold or deduct because you earn no “gross income” and your estate is a “foreign estate” as described in 26 U.S.C. §7701(a)(31).Show them the definition of “individual” in 26 C.F.R. §1.1441-1(c)(3) and ask them to prove that you meet the definition of “individual”. They won’t be able to prove it so they can’t impose a requirement to provide either a number or withhold.
3.2. Show them 26 U.S.C. §871, which only taxes earnings of “nonresident alien individuals”, not “non-resident non-persons”. Only when “nonresident aliens” take privileged deductions are they described as “individuals” in 26 U.S.C. §873. If you say you aren’t taking deductions, then you aren’t a privileged “individual”.
3.3. Show them the following, which proves that you have an unalienable right to declare and establish any civil status you want and that a failure to respect that status constitutes a violation of your First Amendment right of freedom from compelled association:
Your Exclusive Right to Declare or Establish Your Civil Status, Form #13.008 https://sedm.org/Forms/13-SelfFamilyChurchGovnce/RightToDeclStatus.pdf |
3.4. Remind them that all franchises are contracts and that contracts are unenforceable in the presence of duress. Insist on your right to not be compelled to contract with the government by being forced to engage in federal franchises such as the “trade or business” franchise or that of a government “employee”. This is covered further in the following:
Government Instituted Slavery Using Franchises, Form #05.030 https://sedm.org/Forms/05-MemLaw/Franchises.pdf |
4. Showing them the legal authorities described above.
5. Submitting an AMENDED IRS Form W-8BEN to a withholding agent. This causes them to not be able to withhold:
“Foreign persons who provide Form W–8BEN, Form W–8ECI, or Form W–8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting.”
The phrase “(or applicable documentary evidence)” above also covers the following form we prefer over the STANDARD IRS Form W-8BEN:
Affidavit of Citizenship, Domicile, and Tax Status, Form #02.001 https://sedm.org/Forms/02-Affidavits/AffCitDomTax.pdf |
6. Using the following forms to educate them above what a “trade or business” and to prove that you aren’t engaged in one:
6.1. Demand for Verified Evidence of “Trade or Business” Activity: Information Return, Form #04.007
https://sedm.org/Forms/04-Tax/0-CorrErrInfoRtns/DmdVerEvOfTradeOrBusiness-IR.pdf
6.2. The “Trade or Business” Scam, Form #05.001
https://sedm.org/Forms/05-MemLaw/TradeOrBusScam.pdf
If you are a “nonresident alien” or “foreigner”, DO NOT use the STANDARD IRS Form W-8BEN because it contains “words of art” that will prejudice your status and make you look like a “taxpayer” as described in section 5 of the following:
About IRS Form W-8BEN, Form #04.202 https://sedm.org/Forms/04-Tax/2-Withholding/W-8BEN/AboutIRSFormW-8BEN.htm |
Instead use either of the following:
- Affidavit of Citizenship, Domicile, and Tax Status, Form #02.001
https://sedm.org/Forms/02-Affidavits/AffCitDomTax.pdf - AMENDED IRS Form W-8BEN
http://sedm.org/Forms/04-Tax/Withholding/W-8BEN/IRSFormW8BENAmendeds.pdf
For further details on backup withholding, see the following resources:
- Income Tax Withholding and Reporting Course, Form #12.004-contains a summary of all withholding and reporting requirements, including backup withholding. Present this to your private employers and financial institutions if they are unsure of the law
http://sedm.org/Forms/FormIndex.htm - Federal and State Withholding Options for Private Employers, Form #09.001
https://sedm.org/Forms/09-Procs/FedStateWHOptions.pdf
4. List of provisions exempting American Nationals from Backup Withholding if the payor, payee, or both are not residents of the statutory geographical “United States” under 26 U.S.C. 7701(a)(9) and (a)(10)
References:
- 26 U.S.C. 3406
- 26 C.F.R. 31.3406(a)-0 Outline of the backup withholding regulations
- 26 C.F.R. 31.3406(a)-1 Backup withholding requirements on reportable payments
- 26 C.F.R. 31.3406(a)-2 Definition of payors obligated to backup withhold
- 26 C.F.R. 1.1441-1
- Definition of “payor”:
https://dictionary.cambridge.org/us/dictionary/english/payor
In general: Most payments are NOT reportable under 26 U.S.C. 6041(a) because the PAYOR is not lawfully engaged in a “trade or business” , no matter what they believe about that fact, as we prove in Form #05.001. A payment must be reportable before it can be subject to backup withholding under 26 U.S.C. 3406. But since the Payor are the ones who report and do backup withholding, if they do so incorrectly then you will suffer from mistaken reporting and withholding unless you can explain to them using 26 U.S.C. 6041(a) why they in fact are NOT engaged in a “trade or business” (Form #05.001) and that they are simply mistaken.
Exemptions from reporting and therefore backup withholding are listed in 26 C.F.R. 1.1441-1(b)(5) as follows. None of these are terribly relevant to a nonresident alien not engaged in a “trade or business” and doing business outside the statutory geographical “United States”. This seems to be by design to hide the exit door:
# | Description | Withholding | Reporting | 26 C.F.R. §1.1441-1 Authority | Other Authority | Notes |
1.1 | Trade or business income | Exempt | Exempt | (b)(5)(i) | 26 U.S.C. §6041 26 C.F.R. §1.6041-4(a) | |
1.2 | Remuneration for services and certain sales | Exempt | Exempt | (b)(5)(ii) | 26 U.S.C. §6041A 26 C.F.R. §1.6041A-1(d)(3) | |
1.3 | Dividends | Exempt | Exempt | (b)(5)(iii) | 26 U.S.C. §6042 26 C.F.R. §1.604203(b)(1) | |
1.4 | Patronage Dividends | Exempt | Exempt | (b)(5)(iv) | 26 U.S.C. §6044 26 C.F.R. §1.6044-3(c)(1) | |
1.5 | Broker proceeds | Exempt | Exempt | (b)(5)(v) | 26 U.S.C. §6045 26 C.F.R. §1.6045-1(g) | |
1.6 | Interest | Exempt | Exempt | (b)(5)(vi) | 26 U.S.C. §6049 26 C.F.R. §1.6049-5(b) | |
1.7 | Royalties | Exempt | Exempt | (b)(5)(vii) | 26 U.S.C. §6050N 26 C.F.R. §1.6050N-1(c) | |
1.8 | Income from cancellation of debt | Exempt | Exempt | (b)(5)(viii) | 26 U.S.C. §6050P 26 C.F.R. §601.601(b)(2) | |
1.9 | Payment card and third party network transactions | Exempt | Exempt | (b)(5)(ix) | 26 U.S.C. §6050W 26 C.F.R. §1.6050W-1(a)(5)(ii) |
In addition, 26 C.F.R. 1.1441-1(b)(4)(v) establishes that sources without the “United States**” are exempt from withholding under 26 C.F.R. 1.1441-1(a). However, they don’t tie this in with Backup holding, which is handled separately, even though all the other instances in 26 C.F.R. 1.1441-1 mention the relation to backup withholding. Again, this is by design to confuse the reader to make it more difficult to avoid backup withholding for those who are not aliens but rather American Nationals doing business outside the statutory geographical “United States**”:
(b) General rules of withholding—
(4) List of exemptions from, or reduced rates of, withholding under chapter 3 of the Code. A withholding agent that has determined that the payee is a foreign person for purposes of paragraph (b)(1) of this section must determine whether the payee is entitled to a reduced rate of withholding under section 1441, 1442, or 1443. This paragraph (b)(4) identifies items for which a reduction in the rate of withholding may apply and whether the rate reduction is conditioned upon documentation being furnished to the withholding agent. Documentation required under this paragraph (b)(4) is documentation that a withholding agent must be able to associate with a payment upon which it can rely to treat the payment as made to a foreign person that is the beneficial owner of the payment in accordance with paragraph (e)(1)(ii) of this section. This paragraph (b)(4) also cross-references other sections of the Code and applicable regulations in which some of these exceptions, exemptions, or reductions are further explained. See, for example, paragraph (b)(4)(viii) of this section, dealing with effectively connected income, that cross-references § 1.1441-4(a); see paragraph (b)(4)(xv) of this section, dealing with exemptions from, or reductions of, withholding under an income tax treaty, that cross-references § 1.1441-6. This paragraph (b)(4) is not an exclusive list of items to which a reduction of the rate of withholding may apply and, thus, does not preclude an exemption from, or reduction in, the rate of withholding that may otherwise be allowed under the regulations under the provisions of chapter 3 of the Code for a particular item of income identified in this paragraph (b)(4). The exclusions and limitations specified in this paragraph (b)(4) apply for purposes of chapter 3. Additional withholding and documentation requirements may apply to withholding agents under chapter 4 with respect to payments that are withholdable payments. See, for example, § 1.1471-2(a) requiring withholding on withholdable payments made to certain FFIs and § 1.1471-2(a)(4) for payments exempted from withholding under section 1471(a).
(v) Income from sources without the United States is exempt from withholding under sections 1441(a). Documentation establishing foreign status is not required for purposes of this withholding exemption but may have to be furnished for purposes of the information reporting provisions of section 6049 or other applicable provisions of chapter 61 of the Code and backup withholding under section 3406. See, for example, § 1.6049-5(b) (6) and (12) and alternative documentation rules under § 1.6049-5(c). See also paragraph (b)(5) of this section for cross references to other applicable provisions of the regulations under chapter 61 of the Code.
T.D. 8734 upon which 26 C.F.R. 1.1441-1 is based says the following, however, about the coordination between 26 C.F.R. 1.1441-1 and 26 U.S.C. 3406:
B. Comments and Changes to section 1.1441-1
1.Coordination With Other Withholding and Information Reporting Provisions
[30] Commentators noted that withholding and information reporting requirements applicable to payments to foreign persons are governed by a complex web of statutory provisions and that the relationship of these provisions among themselves may be difficult to understand. In response to these comments, a number of changes have been made to help payors and their advisers locate relevant guidance.
[31] As suggested, the table of contents in section 1.1441-0 has been expanded. Section 1.1441-1(b)(4) and (5) has been added to provide an overview of how the withholding and reporting procedures under chapter 3 of the Code relate to the information reporting provisions under chapter 61 of the Code and other withholding regimes under sections 3402 (wage withholding), 3405 (withholding on pensions, annuities, etc.), and 3406 (backup withholding). Provisions explaining the interaction of applicable withholding and reporting provisions in the case of payments to foreign intermediaries or foreign partnerships have been added also. See explanation of those rules, under the heading “Clarification of Reporting and Withholding Obligations for Payments to and by Foreign Intermediaries” of this preamble. Where appropriate, additional cross references to chapter 61 and to sections 3402, 3405, and 3406 have been added in section 1.1441-1 and cross-references in regulations under sections 3402, 3405 and 3406 have also been added.
[32] As a general matter, a withholding agent (whether U.S. or foreign) must ascertain whether the payee is a U.S. or a foreign person. If the payee is a U.S. person, the withholding provisions under chapter 3 of the Code do not apply; however, information reporting under chapter 61 of the Code may apply; further, if a TIN is not furnished in the manner required under section 3406, backup withholding may also apply. If the payee is a foreign person, however, the withholding provisions under chapter 3 of the Code apply instead. To the extent withholding is required under chapter 3 of the Code, or is excused based on documentation that must be provided, none of the information reporting provisions under chapter 61 of the Code apply, nor do the provisions under section 3406. If, however, withholding under chapter 3 of the Code does not apply irrespective of documentation (e.g., in the case of foreign source income or gross proceeds dealt with under section 6045), documentation may nevertheless have to be furnished to the withholding agent under the provisions of chapter 61 of the Code in order to be excused from Form 1099 information reporting and, possibly, from backup withholding under section 3406. Determinations of payee’s status are generally made at each level of the chain of payment, until, ultimately, the payment is made to the beneficial owner. The following example illustrates how these rules interact under the final regulations.
[T.D. 8734, SEDM Exhibit #09.038; SOURCE: https://sedm.org/Exhibits/EX09.038-T-8734-Docket%2097-25998.pdf]
So the above implies since 26 C.F.R. 1.1441-1(b)(4)(v) says documentation is not required for payments outside the United States and the above says that if withholding under chapter 3 of the code does not apply irrespective of documentation, then 26 U.S.C. 3406 may still apply. You can also read the above at:
[…] Nonresident alien individuals NOT engaged in the “trade or business” excise taxable franchise is EXPRESSLY NOT required to make a return if all tax obligations are fully pad at the source. 26 C.F.R. §1.6012-1(b)(2)(i). If they have income “effectively connected” to a “trade or business” under the following, they must file a return:2.1. 26 U.S.C. §871(c) and (d) and 26 C.F.R. §1.871-9 (relating to ALIEN students and trainees temporarily present in the “United States*”).2.2. 26 C.F.R. §1.871-10 (relating to real property income). See Form #05.028 (Member Subscriptions) relating to FIRPTA. FIRPTA is VOLUNTARY for American Nationals.2.3. 26 C.F.R. §301.6402-3 relating to claim for refund of an overpayment. This happens mainly because third parties are engaging in “Backup Withholding” usually WRONGFULLY under 26 U.S.C. §3406. See:Lawfully Avoiding Backup Withholding under 26 U.S.C. §3406, FTSIGhttps://ftsig.org/lawfully-avoiding-backup-withholding/ […]