The IRS is aggressively using the “Substitute for Return” (SFR) program to file tax returns on behalf of those who fail to file. In the old days IRS would just send letters or send someone to your home or office to ask you to file. The SFR program has been around a long time. However, due to better computers at IRS, it is being used now more than ever to get people into filing compliance. Basically, if you do not file on time, the IRS sends you letters and may call you on the phone requesting that you file. If one ignores the letters, IRS takes the information reported to them by third parties and files a Form 1040 for you.
In most cases, the tax owed on this IRS prepared return is far more than one would owe if they filed an original return. This is particularly true if stock or real estate sales are involved. Why is the tax so high on an SFR? Well, IRS does not know who lived with you so they usually file the return single or Married Filing Separate (the worst tax table). A person might have had 3 or 4 dependents, but they won’t be on the SFR. Also, if you worked contract labor and got a 1099, it is very likely you had deductible business expenses. Again, IRS does not know what your expenses were and will tax you on the total of 1099s. In addition, if you sold stock, IRS will tax you on 100% of the sales price because they do not know your basis in the stock. In this circumstance, you could have lost money on the stock and had a deduction, but will owe tax on it due to the SFR.
For business owners who do not file 941 payroll tax or 940 unemployment tax, IRS uses code section 6020(b) to file payroll returns for non-filers. These returns can also be for more than one would have owed if they filed the originals.
Once IRS files an SFR 1040 or a 6020(b) 941, they can collect on them just as if they were filed by the taxpayer. I had one client who had a Federal Tax Lien filed on him for over $100K due to an SFR on 1996. We went ahead and filed a correct tax return in 2004 and his true debt was only about $10K. The reason was because IRS taxed all his stock sales as 100% profits when he had many losses.
There is good news for someone caught in SFR trap. You can always file an original return! The tax laws are valid and IRS is a legitimate government agency. Don’t be fooled by bogus websites or folks who tell you that there is no law requiring one to file a tax return. If you get SFR’d, hire a tax professional to prepare a correct return and work with IRS to overturn the SFR. You may be audited, but if you are right then you will owe much less than the amount on an SFR.
A good CPA, Enrolled Agent, or Tax Attorney can help you with IRS collection issues. DON’T IGNORE IRS LETTERS. GET HELP.
Here is the IRS Address Listing to mail correct returns for processing if they were originally an SFR:
Wage & Interest/Dividend Income Cases
Fresno Campus
ASFR Unit Stop 81304
PO Box 24015
Fresno, CA 93779
Form 1040 with Schedule C, E, F, or Form 2106
Brookhaven Campus
ASFR Unit Stop 654
PO Box 9013
Holtsville, NY 11742-9013
International Returns
Brookhaven Campus
ASFR Unit Stop 654
PO Box 9013
Holtsville, NY 11742-9013
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