When you owe the IRS, or haven't filed returns and might owe
In our 25 plus years, we’ve found that nothing gets non-filers’ attention more than when the IRS notifies them of a balance due. Without returns, the IRS has to file SFRs (“Substitute for Returns”) to create a balance, and this type of case is one of our most frequent.
How is an SFR created? Here’s an example:
- In 2008, you didn’t file your tax return. The IRS, however, received a 1099-MISC for your IT business. It was for $50,000. That’s the only document they received where income was reported for you.
- The IRS asked you to file a return.
- Upon receiving no return from you but knowing you have income, the IRS files a return (SFR) on your behalf for the entire $50,000. There are no business deductions, no dependents, no spouse—just a straight tax on that unadjusted amount.
- Your total is $50,000, minus the standard deduction ($5,450), minus exemption of $3,500. The remaining $41,050 is your taxable income, which yields a taxable amount of $6,613. You work for yourself, so you have the 13.65% self-employment tax on that $50,000: $6,825. Add your taxable income and the self-employment tax, and you owe a total of $13,438 without any penalties or interest.
If you had filed this return with deductions you’d owe a lot less, but the IRS can’t guess deductions for you and now you’re stuck with a greater tax liability.
The first question we’ll ask in every SFR case: should we replace the SFRs with returns and reduce the balance, or let the SFR numbers stand and try to get a settlement around those unfiled returns?
To start, our experienced staff will need to research your IRS record and file Power of Attorney to stop collections. Further work will involve preparing the unfiled returns (if replacing SFRs), filing an Offer in Compromise, declaring Uncollectible Status, or negotiating a livable payment plan.
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