If you do not file your tax returns, the IRS will eventually file them for you. This IRS filing is known as a “Substitute for Return.” These estimated returns are usually incorrect and highly overstate the amount owed. Below is a perfect example.
In 2017, John failed to file a return. John’s only income is social security and a small amount of dividends from some securities he owns. In that year he sold a large portion of his securities because he was buying a house. He failed to report the security sales on a return because he normally does not have to file and, in his mind, he did not make much money on the security sales.
Since the IRS does not know what John’s Basis (cost) is in the security sales, they consider it all to be unreported taxable income. John ignored some IRS notices because, again, he felt he did not make any money on the securities. Due to his non-response, the IRS assumed it was unreported taxable income and moved to collections. Now John was receiving notices they had placed a lien on his new home and were threatening to take a portion of his social security income.
The Solution- File a Return, But Be Careful
We told John this was an easy solution as far as the original problem (Unfiled Return) but would require some professional intervention in the meantime. John must file a return in dispute of the “Substitute for Return” but it MUST be filed to a different IRS unit. Failure to do so, will usually either cause an extreme delay in resolving the problem or the return will never be processed.
Professional Intervention Required
We told John he needed some professional intervention because, until the return is on file and as long as John is right that he did not really make any money on the security sales, the IRS is going to continue the collection process. We must convince the IRS they need to place collections on hold for fear of collection a debt that is not real. This, unfortunately, is not an easy feat and should be left to a Certified Tax Resolution Specialist.