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We help people all the time who haven’t filed in a long time--sometimes five or six years or even a decade! But in many cases like this the IRS has filed a substitute for return FOR the individual. This surprise bill can easily lead to enforcement of collection actions such as levies and liens that the client never saw coming. One day a person can simply find that their bank has been completely emptied by the IRS and now their employer is telling them that the IRS has a levy in place and payday just won’t be the same. Understanding the rules is critical to getting out of this tough situation. As tax resolution specialists in Denver, Colorado, we are here to help navigate these extreme hardships.
If you don’t file a tax return, the IRS has the legal ability to file a return for you! (See IRC Sec. 6020(b).) The IRS name for this is filing a “Substitute For Return” and commonly refers to it as an SFR. A lot of people are unaware of this process and are completely surprised when the IRS starts enforcing collections on a debt they are not even aware existed! The IRS generally uses the worst filing status possible and doesn’t allow exemptions for dependents you could be entitled to. No Child Credits allowed. Even business expenses are completely ignored. They can use an estimate of your gross business income, not allow any business expenses, and send you a huge bill that eventually becomes a legal debt. At times we have seen people owe more than they even made.
When the IRS files a substitute for return on your behalf because you haven’t filed, they generally use a “worst case scenario” of how much you may owe. In other words, they will make you pay the most taxes that they think you could possibly owe.
Once the IRS prepares this return, they have to send you a letter stating that they are proposing the tax return and give you a chance to reply. Unfortunately, the IRS’s only obligation is to send it to the last known address, and if you don’t receive the letter (or receive it and do not reply), then the balance that they are proposing becomes a legal debt as if you filed it yourself! If you have moved and don’t get the notice, then it becomes a ticking time bomb that you are not even aware of. At any time the IRS could levy your bank account, garnish your wages, or a myriad of other collection options of which you may be unaware of until it happens. It’s a bad day to find out that the IRS has taken all of your money and you have no idea why.
Our tax resolution specialists worked recently with a gentleman (goes by BC) that came in to KBPI (Rock Radio station in Denver, CO) when Todd was on the air with DJ Willy B answering questions about tax problems. After being homeless for a few years, BC finally got back on his feet. He landed a job and a place to live. Unfortunately, one day he found out the IRS was filing a substitute for return forcing him to owe over $100,000 and he had no idea why. This was more money than he had earned in total over the last 7 years! How could he owe so much? He asked us for help. It took almost a year, but we were able to protest the returns and have the IRS reverse the tax to the true balance due, which was really about $3,000 in total including the penalties and interest! By the way, the IRS couldn’t even tell us how they came up with such a big number! Regardless, the amount listed was a legal balance due and the only way to fix it was to protest what the IRS had done! If the IRS had denied the protest, they really would have continued all the fury of enforced collections until fully paid!
If you have returns that need to be filed, the best strategy is to file BEFORE the IRS gets involved and files a substitute for return on YOU. We file tax returns for clients all the time for as far back as necessary. If the IRS has already filed returns on your behalf, we can protest the returns. As a side note, we’ve seen cases where it made sense to keep the balance on the books and settle it with an Offer In Compromise instead. But if the IRS is hot on the trail, call soon in hopes of protesting the returns before the IRS starts enforcing collections! If you are the unlucky soul that the IRS has surprised with collection actions and that is how you found out the IRS prepared a return for you, then call as quickly as you can. We need as much time as possible to unravel a solution, stop the collection activities, and help you protest IRS contact us soon. There is no cost for the initial meeting!