Tuesday, February 14, 2012

Unfiled Tax Returns: Why You Should Not Represent Yourself

Whether you are delinquent on filing your taxes, or you haven't filed at all, you'll often find that your tax returns have been filed for you automatically by the Internal Revenue Service. These are called a "Substitute For Return" (SFR). The IRS will give official notice of this action by sending a letter to the taxpayer’s last known address. However, in my experience, most taxpayers have no idea that the IRS prepared a tax return for them until the IRS is actually collecting on the balance due.

Unrepresented taxpayers often fail to replace the SFR returns or quickly (and carelessly) prepare and file tax returns due to IRS pressure. They overestimate the task of resolving their tax problem. A tax professional can research the taxpayer’s record and win additional time to prepare and file proper tax returns which benefit the client.

A qualified tax professional can help you by handling all contact with the IRS. IRS representatives will frequently tell you that you do not need to file an actual return of your own if an SFR return has been filed. Do not take this advice from the IRS. A taxpayer loses many rights, and money, by failing to replace the SFR tax return.

In fact, I recommend that you always prepare and file your own tax return – even if it does not reduce the amount that you owe. Here is why:

1.  The IRS can collect the balance on a Substitute for Return forever. 
The statute of limitations for collection by the IRS does not begin until taxpayer files his own tax return. Generally, the law limits the time within which the IRS can only collect to 10 years. However, this does not apply to taxes due from an SFR. For this reason alone, you should file the return.
IRS Code §6501(b)(3), Return Executed By Secretary: “The execution of a return by the Secretary pursuant to the authority conferred by such section shall not start the running of the period of limitations on assessment and collection.”

2. SFR returns will almost always be inaccurate or missing key information. 
An SFR return almost always lacks the information a taxpayer would have included on a return he prepared and filed himself – including deductible interest payments and taxes, business expenses, allowable tax credits, dependents, proper basis for capital gains, and other important information. The SFR program does NOT allow any of these reductions in your taxes until your own paperwork is submitted. 

3. The tax due on a SFR return is usually much higher than a return filed by you. 
This is because of the missing or inaccurate information mentioned above.

4. The tax due on these SFR returns cannot be eliminated through bankruptcy. 
 The bankruptcy law requires you to file your tax return before it can be “discharged” (eliminated) in bankruptcy. SFR returns do NOT counted as filed returns and the tax due will NOT go away if you ever file a bankruptcy.

5. You may lose your right to a refund if you fail to replace an SFR return. 
 Sometimes, the balance shown in an SFR tax return is paid by the taxpayer or through offsets and levies. But when a return is actually filed, the taxpayer will discover that he overpaid and is due a refund. If the tax is adjusted and a refund is due, you will lose your right to the refund after three years (this is called forfeiture).

Finally, a tax professional will allow you to avoid unnecessary contact with the IRS and give you the time to pull together your documentation so a package can be prepared by you and your attorney and submitted to IRS before the situation accelerates and spins out of control.

In short, a situation with unfiled returns has too many pitfalls for you to try to go it alone.

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