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Accuracy Is Not An Option, It Is An Imperative


A number of weeks ago, I had occasion to read a "tax honesty" editorial in which was found the following declaration:

"The Code of Federal Regulations clearly advises the employers at 26 CFR §31.3402(p)-1(a) "An employee who desires to enter into an agreement for withholding...shall furnish his employer with Form W-4 (or its equivalent) for withholding. The furnishing of such Form W-4 shall constitute a request for withholding." Then, 31 CFR §215.2(n)(1) clearly tells the employers they cannot take amounts from the workers' pay for any form of State tax UNLESS the employee VOLUNTARILY elects to have such sums withheld."

I would not normally have been impelled to devote any special attention to such a piece, but I have reason to believe that the errors informing this one are being widely disseminated.  This is very troubling, for achieving the goal of securing lawful behavior from a system not at all inclined to its practice will be severely retarded by the promotion of error, as potential allies and converts are taught by bitter experience that the arguments upon which they are urged to rely are faulty.  When would such open minds, once burned, be again available to the cause?  Consequently, I undertook to bring the relevant misunderstandings of the law to the writer's attention, so as to facilitate halting their dangerous spread.


Unfortunately, this writer has made clear that she intends to disregard the facts and carry on.  I feel obliged, therefore, to present the issue publicly, so that those with access to these comments, at least, can be armed against the hazard.  What follows are the texts of my two messages and a synopsis of the replies which I received, slightly edited for brevity:


Ms. ____,


    I am at a loss to understand your inclusion of references to 31 CFR 215 etc. in your recent column about withholding, titled ‘______’.  That CFR section addresses nothing but governmental operating entities within the exclusive jurisdictional domain of the federal government.  The section has nothing whatever to say to private-sector companies:

31 CFR §215.1   Scope of part.
This part relates to agreements between the Secretary of the Treasury and States (including the District of Columbia), cities or counties for withholding of State, city or county income or employment taxes from the compensation of civilian Federal employees, and for the withholding of State income taxes from the compensation of members of the Armed Forces. Subpart A contains general information and definitions. Subpart B prescribes the procedures to be followed in entering into an agreement for the withholding of State, city or county income or employment taxes. Subpart C is the Standard Agreement which the Secretary will enter into with any State, city or county which qualifies to have tax withheld. Requests for deviations from this Standard Agreement will be agreed to by the Secretary only if the State, city or county's unique circumstances require it.

(The section 215.2 to which you refer provides definitions for the 'part' to which 215.1 refers.)




    Your discussion of 3402(p) is also misleading.  The following excerpt of 'W-4's: The Blind Leading The Blind Down A Primrose Path' from 'Cracking the Code- The Fascinating Truth About Taxation In America' should serve to clarify: 


          With most of the “income” tax forms of this type, what has been said so far would cover the subject well enough, at least as regards the applicability of the instrument to private-sector workers, and I could keep this part of the book short.  The W-4 is a bit more complicated, however, perhaps in the interest of pacifying the rare, legally knowledgeable cat’s-paw business upon which the scheme is so reliant.  As such a business might otherwise fear the legal consequences of unlawfully demanding the form as a condition for fulfilling the obligations of the contract into which it has entered with a worker, or be cognizant of the consequences of pretending to be a federal official (the only entity in connection with which a W-4 could be required), the law regarding the W-4 is equipped with what appears to be a “safe harbor” element.  That element is subparagraph (p)(3)(B) of section 3402.  Here it is (with emphasis added):

Sec. 3402. - Income tax collected at source

(p) Voluntary withholding agreements

(3) Authority for other voluntary withholding

The Secretary is authorized by regulations to provide for withholding


(A) from remuneration for services performed by an employee for the employee's employer which (without regard to this paragraph) does not constitute wages, and


(B) from any other type of payment with respect to which the Secretary finds that withholding would be appropriate under the provisions of this chapter, if the employer and employee, or the person making and the person receiving such other type of payment, agree to such withholding. Such agreement shall be in such form and manner as the Secretary may by regulations prescribe. For purposes of this chapter (and so much of subtitle F as relates to this chapter), remuneration or other payments with respect to which such agreement is made shall be treated as if they were wages paid by an employer to an employee to the extent that such remuneration is paid or other payments are made during the period for which the agreement is in effect.  (I’m confident that we can all easily think of dozens of ‘other types of payments’ regarding which we would be grateful for the benefits of this provision of the law, right?).


By virtue of this provision, a nervous private-sector company might still cooperate with the scheme, presuming that it can claim it just thought it was agreeing to an optional request to withhold when accepting that W-4 and handing over to a third party money owed to a worker.

          However, despite the language of 3402(p)(3)(B), the Secretary of the Treasury has promulgated no regulations providing for any particular “form or manner” of agreement between a “person” and another “person” (although he has provided several pages of such regulations for voluntary withholding agreements between “employees” and “employers” pursuant to 3402(p)(3)(A)).  Therefore, the characterization of payments made to a worker as being subject to withholding is-- wishful thinking to the contrary notwithstanding-- entirely the doing, and the risk, of the business doing the withholding.  The poorly constructed language of the statute only provides for the possibility of this extra-curricular withholding pursuant to a regulatory structure-- lacking such, it is a mere will-o’-the-wisp.

          Though perhaps a bit disingenuously, a worker could and would easily and credibly maintain, in the course of suing or prosecuting a business over what is no more or less than theft-by-conversion, that in addition to responding to the coercion and false claims of authority by which she was induced to execute the form, she at bottom complied because of the reasonable presumption that the W-4 would only become an active instrument if and when the business’s affairs contrived to cause her pay to be effectively connected with a taxable activity.  That the business instead withheld from her private-sector, untaxable receipts is entirely its own responsibility.


          Needless to say, and despite 3402(p)(3)(B), treating payments as though they were “wages” paid to an “employee” does not transform them into “income”, if they are actually paid to a private-sector worker.  Chapter 24 imposes no tax at all (nor does subtitle F)-- it simply provides for withholding.  The amounts withheld under its provisions are credited against any liability for “income” tax which might be found to exist under the provisions of subtitle A-- in regard to which, as we know, remuneration for private-sector work is explicitly excluded.  (We’ll explore this area in detail later when we look at what the law says about refunds.)




          Possible rationales for its completion and submission do not change the fact that a W-4 becomes a piece of evidence amounting to a signed declaration of “wage”-paid-“employee” status.  Through this form, the company for whom the victim works is provided a justification for issuing a W-2 at the end of the year, and authorization for withholding and diverting to a third party part of what is owed to the worker; and the IRS is supplied an excuse for the legal presumption that the individual in question is a government “employee” whose pay is therefore “income” upon which taxes can lawfully be demanded.

          Anyone currently working for others who has been forced or fooled into improperly submitting a W-4 might wish to withdraw the authority to withhold that the form represents by filing an appropriately worded instrument with their personnel department.  Such an instrument would look something like this:



(Company's Name) is notified hereby that I,      (Worker’s Name)     , am declaring ended and withdrawn as of this date,      (Today's Date)     , any and all authorization and/or agreement for the withholding of any portion of compensation owed me for services rendered howsoever such authorization and/or agreement may have been conveyed, executed, or implied at any time.

___________________________________________ ____/____/____


          Because an agreement between a non-"employee" and a non-"employer" regarding withholding is neither regulated nor required, one can end it at any time by simply withdrawing any implied or explicit permission.

          (Those being coerced to execute a new W-4 might wish to consider a disclaimer similar to the one that can be seen at www.losthorizons.com/appendix.htm#W-4.  Simply filing "Exempt" is not a proper strategy, by the way, nor legal-- all the provisions of law relating to W-4's apply only to "employees", including that one.  "Exempt" does not mean "under no obligation", it means "conditionally released or excepted from obligation".)


   This chapter presumes an understanding of the material in the previous 13, of course, such as the meaning of "includes" and "income", as well as a much more detailed discussion of the meaning of "employee" and "employer".  I think that, based upon other material of yours that I have read, that you have a fair handle on those concepts.  Even if not, though, the above should suffice to make clear enough the fallacy in the 3402(p) argument.   I fear that you may be being misled by your advisors.




-Pete Hendrickson




In reply to this first message, I received a curt 5 sentences asserting the expertise of advice relied upon, but suggesting that my correspondent had not read beyond the first line and had assumed the whole to be a general critique of the demand for lawful administration of the “income” tax.  This is forgivable, as this person is doubtless the recipient of much mail; probably cannot find the time to give proper attention to each and every piece; and perhaps does indeed receive a fair bit of that assumed demeanor.  However, the importance of the issue requires that it be attended to.  Consequently, I wrote again:


Ms. ____,

    You misunderstand me.  What I am attempting to draw to your attention is that the elements of law that you cite in your recent piece are not properly relevant to the conclusion which is rested upon them.  As I pointed out, 31 CFR 215.2(n), which you cite, is a definitional provision relating to withholding of State, city or county income or employment taxes from the compensation of civilian Federal employees, and for the withholding of State income taxes from the compensation of members of the Armed Forces.

 Here is the paragraph in its entirety:


31 CFR 215.2(n) State income tax means any form of tax for which, under a State status:

(1) Collection is provided, either by imposing on employers generally the duty of withholding sums from the compensation of employees and making returns of such sums to the State or by granting to employers generally the authority to withhold sums from the compensation of employees, if any employee voluntarily elects to have such sums withheld; and

(2) The duty to withhold generally is imposed, or the authority to withhold generally is granted, with respect to the compensation of employees who are residents of such State.


The complete meaning of the provisions of this paragraph is clarified by paragraph (h) of 31 CFR 215.2:

(h)(1) Employees for the purpose of State income tax withholding, means all employees of an agency, other than members of the armed forces. For city and county income or employment tax withholding, it means:

(i) Employees of an agency;

(ii) Members of the National Guard, participating in exercises or performing duty under 32 U.S.C. 502; or

(iii) Members of the Ready Reserve, participating in scheduled drills or training periods, or serving on active duty for training under 10 U.S.C. 270(a). The term does not include retired personnel, pensioners, annuitants, or similar beneficiaries of the Federal Government, who are not performing active civilian service or persons receiving remuneration for services on a contract-fee basis.

(2) Employees for purposes of District of Columbia income tax withholding, means employees as defined in 47 District of Columbia Code 1551c(z).

(i) Members of the Armed Forces means all individuals in active duty status (as defined in 10 U.S.C. 101(22)) in regular and reserve components of the Army, Navy, Air Force, Marine Corps, and Coast Guard, including members of the National Guard while participating in exercises or performing duty under 32 U.S.C. 502, and members of the Ready Reserve while participating in scheduled drills or training periods or serving on active duty for training under 10 U.S.C. 270(a).


       Similarly, while 3402(p) would appear at first blush (and if taken out of context) to have bearing on other than federal workers, the section is explicitly dependent upon regulatory implementation, and the only such implementation provided is explicitly confined to federal workers.  I welcome any correction to these observations that you would care to make, but a simple assertion of the expertise of your colleague will not suffice, and is, furthermore, mildly discourteous in light of the substance with which I have presented my points.

I am sure that you will agree that the eventual success of our mutual mission will not be realized without scrupulous accuracy in our assertions.  Happily, such accuracy does indeed support our success, but it is not being drawn upon in the use of the citations which we are discussing.




-Pete Hendrickson




As noted earlier, my correspondent's replies have amounted to a declaration of the intent to stand fast.  I remain willing to entertain the possibility that this is due to her still having not actually read what I have sent, but regardless, I can expect no effort to correct the ill effects of past or future disseminations of these errors from that quarter.  Therefore, I hope that all those in a position to do so undertake to rectify these misunderstandings on their own, whenever possible.


(31 CFR 215 can be read in its entirety here: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=5b69d22a5729b1e3a5eda6dfc68b51c6&rgn=div5&view=text&node=31:


Here is the text of section 26 CFR 31.3402(p)-1(a):

§  31.3402(p)-1  Voluntary withholding agreements.

(a) In general. An employee and his employer may enter into an agreement under section 3402(b) to provide for the withholding of income tax upon payments of amounts described in paragraph (b)(1) of §  31.3401(a)-3, made after December 31, 1970. An agreement may be entered into under this section only with respect to amounts which are includible in the gross income of the employee under section 61, and must be applicable to all such amounts paid by the employer to the employee. The amount to be withheld pursuant to an agreement under section 3402(p) shall be determined under the rules contained in section 3402 and the regulations thereunder. See §  31.3405(c)-1, Q&A-3 concerning agreements to have more than 20-percent Federal income tax withheld from eligible rollover distributions within the meaning of section 402.

(The entire section can be viewed here.)


Comments Regarding Other Misunderstandings Of The Law