January 22, 2007
by Jay Freeborne, E.A., Washington Tax Services
From the thousands of contacts Washington Tax Services receives every year, our most recent experience is an escalation in "Substitute for Return" cases and "Audits." This trend seems to confirm rumors that audits and compliance cases increase during Republican administrations, while in Democratic administrations, collection cases grow.
Substitute for Returns (SFRS)- Why are they filed?
The only way for the IRS to get after NON-FILERS is to take the documents filed with them: 1099s and W2s, .e.g., and create returns WITHOUT any deductions. These returns are called "Substitute for Returns" or SFRS. If you are self-employed, of course, you don't receive any normal business deductions like mileage or fuel. Or, if you are married or have dependents, you lose: the IRS files the forms for you as a single person. The point is: "SFRS" are wake up calls. Wake up calls for you to get back into the system: to file and pay your taxes.
Collecting on SFR Balances
Unfortunately in the IRS's view, a SFR created liability is the same as any other liability, their duty is to COLLECT. If a taxpayer is simultaneously being SFR'ed and collected against, the object is to get the IRS to accept RETURNS to replace the SFRS (SFR Reconsiderations). Subsequently as SFR debts are drastically higher than your normal debt, it is important to get IRS collection agents to address the lower debt (or refund if that is the case).
When do SFRS NOT need to be replaced?
When the follow criteria are met:
1. SFR balances are VERY HIGH
2. Replacing the SFRS is difficult (information lost, etc.)
3. The client has a financial hardship that would prove him/her unable to pay the debt.
In the above circumstances, SFRS can be reduced in the Offer in Compromise program. Finally, the IRS often files SFRs for you that have a ZERO balance. Obviously unless there is a large refund at stake, you can elect to accept the returns the IRS filed for you.
