Sam Shiatsu is a self-employed massage therapist and is the brother-in-law of a partner in the CPA firm where you work. During tax year 2008, Sam worked as an assistant supervisor and clinician for the Western College of Oriental Massage in Gila Bend, Arizona, an institution owned by Massage Center, Inc. (MCI). Sam was paid $20,500 with checks issued by MCI for services he provided to MCI pursuant to a contract, which stated that MCI would file a Form 1099-MISC, Miscellaneous Income, with the IRS and that Sam would be responsible for paying any tax liability that resulted from the payments. Sam has a B.S. degree in accounting, a master’s degree in industrial relations, and a B.S. degree in nutrition. Sam, although not an attorney, also has four years of experience as a justice of the peace in Blanco, Texas.

Sam did not file a tax return for tax year 2008 and he did not pay any federal income tax or make any payments of estimated tax for that year. He did not file a return because he claims he is a citizen of the “Republic of Arizona” and therefore not subject to the U.S. federal income tax. On February 25, 2010, the IRS mailed Sam a notice of deficiency setting forth respondent’s determination of a deficiency in petitioner’s income tax for tax year 2008 and additions to tax.

Tracy (your boss) asks you to research this issue and determine Sam’s exposure for not filing his 2008 tax return. Summarize in a short internal memo the key points you find.