Can My IRS Debt be Reduced? – SFR Returns
By Steven A Leahy
One of the first questions IRS clients ask me is “Can you reduce my IRS Debt?” The answer to that question is – sometimes.
Many of my clients are non-filers. That means they haven’t filed their tax returns in some time. If a tax return has not been filed, the IRS will often file the return for the taxpayer. However, when the IRS files a return they don’t include any exemptions or deductions. This kind of return is called a Substitute for Return (SFR). The purpose of the SFR is to prod the taxpayer to voluntarily file a return, or, if a voluntary return is not forthcoming, determine the tax, interest and penalties based upon the information the IRS has.
Usually, the SFR greatly exaggerates the actual amount of tax due. Often, the SFR involves a tax period where an important economic event occurs – a house is sold, some stocks are sold, or some other valuable asset is sold. Because the taxpayer failed to file a tax return, the SFR will include the value of the sale, but will not include a deduction for the basis of the asset – the amount the taxpayer paid for the asset in the first place.
For example, if I purchase stocks for $75,000.00, and later sell the stocks for $76,000.00, the profit on the stock is $1,000.00. The purchase price on the stocks, $75,000.00, is my basis. If the basis is not deducted from the sale price, as happens in an SFR, I will be taxed on the full sales price, $76,000.00. Filing my own return, and deducting the basis from the sale price, would result in a tax on the profit of $1,000.00. The SFR will result in a substantial tax obligation; a voluntary tax return will not.
I have had clients assessed taxes of $100,000.00 and more, much more, for a single year because the IRS completed an SFR for the unfiled returns. In one case in particular, the client sold a house. The sale price of the house was included as income on the SFR, resulting in a tax obligation of more than $220,000.00. The client had not filed in nine (9) years. Our client received notices of collection efforts by the IRS, including threats of levies. We held the IRS at bay while we completed our investigation and the delinquent returns. In the end, the client actually received a refund. The process took many months to complete – but there was a bright outcome.
Not filing returns may also result in other consequences. For example, an SFR does not trigger the running of the statute of limitations or the 3-year period of assessment. So, there isn’t a time limit on how long the IRS can collect on that IRS debt or reassess new taxes. That is never a good thing.
There are other techniques to reduce an IRS debt, including a penalty abatement and investigative audits. I will explore these techniques in future blog posts.
So, if you have unfiled returns, you should consult with a local attorney who may be able to reduce your IRS debt. Before you do anything, you should give me a call. We can discuss your options, complete your delinquent returns and perhaps reduce your IRS debt. – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.