The IRS is aggressively using the “Substitute for Return” (SFR) program to file tax returns on behalf of non-filers. In the old days, the IRS would simply send letters or send someone to your home or office to ask you to file. The SFR program has been around for a long time. However, because of the better computers at the IRS, it is being used now more than ever for people to file. Basically, if you don’t file on time, the IRS sends you letters and can call you on the phone to ask you to file. If you ignore the letters, the IRS takes the information reported to you by third parties and files a Form 1040 for you.
In most cases, the tax due on this IRS-prepared return is much more than one would owe if filing an original return. This is particularly true if you are dealing with stock or real estate sales. Why is the tax on an SFR so high? Well, the IRS doesn’t know who lived with you, so they usually file single or married filing separately (worst tax table). A person may have had 3 or 4 dependents, but they will not be in the SFR. Also, if you worked for hire and got a 1099, you most likely had deductible business expenses. Again, the IRS doesn’t know what your expenses were and will tax you on the full 1099. Also, if you sold stock, the IRS will tax you on 100% of the sale price because they don’t know your basis in the stock. In this circumstance, you could have lost money on the stock and have a deduction, but you will still have to pay taxes due to the SFR.
For business owners who do not file the 941 payroll tax or the 940 unemployment tax, the IRS uses code section 6020(b) to file payroll returns for non-filers. These returns can also be for more than one would have owed if they were submitting the originals.
Once the IRS files an SFR 1040 or a 6020(b) 941, they can collect them as if they were filed by the taxpayer. I had a client who had a federal tax lien filed on him for over $100K due to an SFR in 1996. We went ahead and filed a correct tax return in 2004 and his actual debt was only $10K. The reason was because the IRS taxed all your stock sales as 100% profit when you had a lot of losses.
There is good news for someone caught in the SFR trap. You can always submit an original return! The tax laws are valid and the IRS is a legitimate government agency. Don’t be fooled by bogus websites or people who tell you there is no law that requires you to file a tax return. If you get SFR’d, hire a tax professional to prepare a correct return and work with the IRS to void the SFR. You may be audited, but if you’re right, you’ll owe much less than the amount of an SFR.
A good CPA, enrolled agent, or tax attorney can help you with IRS collection issues. DO NOT IGNORE LETTERS FROM THE IRS. GET HELP.
Here is the list of IRS addresses to submit correct returns for processing if you were originally an SFR:
Salary and Interest/Dividend Income Cases
Fresno Campus
ASFR unit stop 81304
post office box 24015
Fresno, CA 93779
Form 1040 with Schedule C, E, F, or Form 2106
Brookhaven Campus
ASFR 654 unit stop
post office box 9013
Holtsville, New York 11742-9013
international returns
Brookhaven Campus
ASFR 654 unit stop
post office box 9013
Holtsville, New York 11742-9013