September 17, 2008

Don't Let the IRS Tell You How Much You Owe Them

Listen to this bit of news – the IRS does make mistakes! They make clerical and math errors; they assess taxes, interest and penalties to the wrong taxpayer account; their computers crash and generate erroneous notices; they give bad tax advice when you call them on the phone; and they misapply the law among other mistakes.

If you haven't filed taxes for a few years you can actually save money by filing "original" tax returns for those years past. Sounds counterintuitive doesn't it? Saving money by filing a tax return? Aren't they supposed to tell the IRS you owe them money? Well, yes … but here's the thing … the IRS already knows you owe them money, and when you don't file a tax return for any given year they go ahead and file one for you. Isn't that nice?! It's called a Substitute for Return or SFR.

With an SFR the IRS files a tax return for you based on all the information that's been reported to them; wages, commissions, stock and real estate sales, etc. They give you a minimum amount of deductions and credit you for any taxes you had withheld from your paycheck for that year (if you were a wage earner). Using this information they arrive at a number they think you owe in taxes. They add penalties for not filing, penalties for not paying and interest on both the taxes and the penalties. Then they send you a notice.

The problem with an SFR is multifaceted. Here's why. When determining your deductions they will give you a minimal exemption status. Meaning if you've never filed jointly they'll consider you "single," if you've filed as married-jointly they'll consider you "married filing separate." Another problem that exists with an SFR is all stock and real estate sales are added to your income at gross sales value without consideration for cost basis.

In today's market that means if you sold some stock for $25,000 they add that amount to your income. The fact you originally bought the stock ten years ago for $125,000 is not their problem. It's up to you to report your cost basis to the IRS on your tax return. This situation is very common and would result in your income being increased when a loss was really present.

Although these are a couple of the most common examples, understand this; if you have an SFR filed for you in any given tax year, it will always be filed in a manner that is in the best interest of the government not your best interest. With that being said, the trained eye of an experienced tax problem resolution professional can identify more subtle mistakes by the IRS with an SFR and help you to file an "original" amended return that can reduce and in some cases eliminate your tax debt completely.

If this has happened to you and you don't know where to turn, give us a call tollfree at (888) 438-6474. We represent clients all around the United States and the world.