Taking A Cooperative Approach To Your Legal Issues

What is a Substitute for Return?

| Dec 8, 2013 | Firm News

So, you did not file income tax returns with the IRS and are wondering what is going to happen, when will the IRS catch up with me, etc. Generally, the answer is nothing good happens and the IRS will, eventually, catch up.

The Internal Revenue Code gives the IRS authority to use all information available to make an assessment against any taxpayer with an income tax filing requirement who fails to fulfill that requirement. This is known as the Substitute for Return (SFR) procedure. When the IRS follows this procedure they will complete an income tax calculation in a manner most favorable to the government based on any information reported to it via W-2s or 1099s, and information it obtains by issuing summonses to third parties, like your bank. The taxpayer is only given the standard deduction, no exemptions, no business expenses, etc. The result is usually a much higher tax bill than the taxpayer would have if they had filed on their own. No bueno!

There is no statute of limitations on the IRS’ ability to make an assessment of tax when no tax return is filed by a taxpayer. So, the IRS can make an assessment going back potentially many years; often the last 6 years will be considered fair game.

It is a good bet the IRS will also impose penalties when they apply the SFR procedure. Penalties can be both civil and criminal (yes, failing to file an income tax return can be a criminal offense, but that is another topic). Civil penalties include a failure to file penalty, an underpayment of estimated tax penalty, and a failure to pay penalty. These penalties, combined with interest, can add up to a sum that is sometimes more than the tax originally owed. The reason many taxpayers do not file their tax return is because they can’t afford to pay the tax. It’s unfortunate, but failing to file a tax return only compounds the problem. An income tax return should always be filed timely even if the tax due cannot be paid. There are options to deal with any balances that truly can’t be paid immediately such as an installment agreement, currently not collectible status, or an offer in compromise.