The IRS is aggressively using the “Substitute for Return” (SFR) program to file tax returns on behalf of those who do not. In the old days, the IRS would only send letters or send someone to your home or office asking you to apply. The SFR program has been around for a long time. However, due to the better computers at the IRS, it is being used now more than ever for people to comply with the return. Basically, if you don’t file your return on time, the IRS sends you letters and can call you on the phone to request that you file the return. If you ignore the letters, the IRS takes the information from third parties and files a Form 1040 for you.

In most cases, the tax owed on this IRS-prepared return is much more than what would be owed if you filed an original return. This is particularly true if you are dealing with sales of stocks or real estate. Why is the tax so high in an SFR? Well, the IRS doesn’t know who lived with you, so it usually files the single or married return 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 as a contract labor and earned a 1099, it is highly likely that you had deductible business expenses. Again, the IRS does not know what your expenses were and will tax you on the total of 1099. Also, if you sold shares, the IRS will tax you on 100% of the sale price because they do not know your basis in the shares. In this circumstance, you could have lost money on the stock and have a deduction, but you will have to pay taxes due to the SFR.

For business owners who do not file payroll tax 941 or unemployment tax 940, the IRS uses code section 6020 (b) to file payroll returns for non-filers. These statements can also be for more than one would have owed if the originals had been submitted.

Once the IRS files an SFR 1040 or 6020 (b) 941, they can collect them as if they were filed by the taxpayer. I had a client who was presented with a federal tax lien for more than $ 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 of 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 file an original return! Tax laws are valid and the IRS is a legitimate government agency. Don’t be fooled by fake websites or people who tell you that there is no law that requires you to file a tax return. If you get SFR, 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 are right, you will owe much less than the amount of an SFR.

A good CPA, enrolled agent, or tax attorney can help you with IRS collection problems. DO NOT IGNORE THE IRS LETTERS. GET HELP.

Here is the list of IRS addresses to mail the correct returns for processing if they were originally an SFR:

Wage and interest / dividend income cases

Fresno Campus

Unit stop ASFR 81304

P.O. Box 24015

Fresno, CA 93779

Form 1040 with Schedule C, E, F or Form 2106

Brookhaven Campus

ASFR 654 unit stop

P.O. Box 9013

Holtsville, NY 11742-9013

International returns

Brookhaven Campus

ASFR 654 unit stop

P.O. Box 9013

Holtsville, NY 11742-9013