What is a substitute filed tax return? As a tax attorney, I have seen the IRS and state taxing authorities file tax returns for taxpayers when the returns are not voluntarily filed. The article and video below should provide some information regarding a substitute tax return.
So you never filed a tax return, but yet you are receiving notices from the Internal Revenue Service that you owe taxes. So what happened? How could owe taxes to the IRS when you never filed the return? The answer: The IRS has filed the return for you under Section 6020(b) of the Internal Revenue Code. Under the Internal Revenue Code the IRS can file a tax return on a taxpayer’s behalf when the return is not voluntarily filed. These returns are typically referred to as substitute filed returns, SFRs or 6020(b) returns. Regardless of the term used, the IRS has filed the return for you and is now attempting to collect on the debt.
How can the IRS file a return for me? The IRS will file the return based upon information they have received. For example, you may have received W-2 income and/or 1099 income and the IRS will (or should) receive this information from third party employers or payors. Additionally, you may have received other 1099s such as 1099Bs reporting stock sales. The IRS will collect all of this wage and income information and assess you the tax, and penalty and interest. The problem with the IRS preparing the tax return is they will not give you the benefit of certain items or credits that may help lower your tax bill. When the IRS files a return on your behalf, you will not get the benefit of the doubt and likely your filing status will be single, with no dependents and the standard deduction claimed. Thus, you will be assessed about the highest amount of tax possible.
As an example, I have seen many taxpayers who receive a notice from the IRS assessing thousands of dollars in tax when in reality the taxpayer owed significantly less tax or was due a refund. For example, say Jeffrey had a W-2 with $50,000, 1099 income of $25,000 and sold stock receiving $25,000. Further, Jeffrey has 3 children and a wife. In short, the IRS would file Jeffrey’s return stating Jeffrey as single with more or less $100,000 of income and give Jeffrey the standard deduction. In reality, Jeffrey had $15,000 of business related expenses to offset some of the 1099 income and had purchased the stock for $30,000 thus had a $5,000 loss. Jeffrey’s adjusted gross income should thus be closer to $57,000 ($50,000 + $10,000 – $3,000). Further, Jeffrey should have exemptions for his children, may be able to claim certain tax credits and may be able to itemize his deductions or take the higher standard deduction of filing married filing joint. Therefore, the amount of tax Jeffrey would owe is going to be significantly less than what the IRS would assess him.
If you have received an audit notice from the IRS or another IRS notice assessing you taxes, speak with a Denver tax attorney at The McGuire Law Firm. A tax attorney at The McGuire Law Firm can help you resolve your IRS matters and educate you so as to help prevent the issue from occurring again.
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