Succumbing to a Substitute for Return

Failing to file a tax return can prove problematic, especially when you take a close look at how the IRS will inevitably respond.

Failing to file a tax return can prove problematic, especially when you take a close look at how the IRS will inevitably respond. Whether you’ve simply procrastinated in your annual filing duty or you’ve willfully skipped the task, you have a finite amount of time to correct your course. The fact that you haven’t provided a return detailing your income will not impede the IRS from determining what you owe.

This assessment is carried out on a Substitute for Return, which is filed on your behalf by the government. While this might sound like a convenient solution to your oversight, the results can prove costly. Consider the IRS’ order of operations before accepting any substitutes for your tax return.

Heed Any Notices

You’ll be sent a series of reminder letters from the IRS in the event that you skip your tax return. These notices are intended to prompt you to get your return filed as quickly as possible to avoid further action. The IRS will allow some time, perhaps as long as a year, for you to comply. Bear in mind, they likely have a clear understanding of what income you received for the tax year in question. This information has been provided by your employers, your bank and, if applicable, brokers handling your investments. This gives the IRS a precise idea of how much you were paid and, if you don’t respond to their notices, they will take matters into their own hands.

Your Tax Return’s Substitute

Let’s assume for a moment that you take no action after receiving reminder notices. Eventually, the IRS will prepare a Substitute for Return, which they will use to determine your liability. After they’ve assessed any balance you owe, you’ll receive a request for payment. The disadvantage for you is that this substitute return does not include any deductions or credits that you may be eligible for, which can substantially lower what you actually owe. This is especially important if you’re a contractor, as your personal expense deductions are critical in avoiding a massive tax debt.

Additionally, any children you have will not be included as dependents. The difference in what you actually owe and what they determine you owe, based on the limited information they’re working with, can be hundreds or even thousands of dollars. In some cases, you may be due a refund rather than owing. Finally, the IRS assesses penalties and interest for unpaid balances, which can augment your total.

Reclaiming Your Return

Even after the IRS files for you, you’re still afforded the opportunity to remedy the situation. As long as you file your missing return within three years of the date it was due, the IRS will accept it and modify their assessed balance. If you choose not to act, you’ll be responsible for paying their estimated balance in full. Simply ignoring payment notices isn’t really an option, as the IRS can ultimately garnish your wages or levy your bank account for the amount you owe.

Advanced Concerns

If you’re already facing IRS collection action, or you have several years’ worth of returns to catch up on, consult a licensed tax professional. There’s no reason you have to pay the ultimate price for missing a tax return, but it’s important to fully understand your position with the IRS. A tax professional can obtain this information and, if necessary, quickly negotiate a solution.

From the Author: Substitute for Return

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