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WHAT IS AN IRS SUBSTITUTE FOR RETURN?

What will the IRS do if I don’t File my Tax Returns?

If you don’t file your tax returns, the IRS could file a tax return for you. This is called an IRS substitute for return, or SFR. The IRS typically has three years from the date of filing to examine your return and assess additional tax liabilities. However, if you don’t file, the statute of limitations for assessment never begins to run. Even when the IRS files an SFR return for you, the statute of limitations for assessment does not begin to run because you have not filed a return. However, the IRS will begin enforced collection actions after it files a substitute return for you. The general rule that the IRS has 10 years from the date of assessment to collect a tax liability still applies. The IRS has promulgated helpful information regarding SFRs.

How does the IRS make a Substitute for Return Assessment?

The IRS collects various tax information and documents pertaining to you that has been reported by third parties. These documents could be a W2 or a 1099 from an employer, or a K-1 from a business or trust. The IRS will use this information and use it to prepare a basis tax return for you. The IRS will not give you all of the deductions that you could be entitled if you had filed the return. The IRS will give you the standard deduction, however. For example, the IRS could use a 1099 to create a schedule C for you without giving you any deductions you were entitled to if you had filed the return. In addition, the IRS often uses 1099s forms that report the sale of property and insert the sales price without any basis adjustments. This has the effect of grossly overstating a taxpayer’s income. Therefore, it is often the case that if the taxpayer files the return, the tax liability would be reduced significantly.

What to do if the IRS files an SFR on Your Behalf

If you have SFRs, you should consider filing those tax returns as soon as possible for a few reasons. First of all, if you are entitled to a refund, you should file so that you timely claim your refund. If your refund claim is untimely you will not be able to obtain a refund. Secondly, if you have a tax liability that is too high based on the IRS information that doesn’t include appropriate basis or deduction adjustments, if you file the return, the liability may be reduced. In addition, if tax returns are not filed, bankruptcy will not be an option. Filing a late return could possibly still qualify you to discharge your taxes in bankruptcy. We can do a background analysis on your tax account to review all information necessary for you to make a determination to file or not.

Contact a Tax Attorney

If you have unfiled tax returns, contact a tax attorneys at Disparte Tax Law today for a free consultation. Our attorneys have almost a decade of experience in tax law and procedure and can explain your rights and options and can help you resolve your tax dispte.

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