The SFR and the Tax Return Non Filer

           After more than forty years of experience I can tell you this: lots of people don’t file tax returns. Their excuses run the entire gamut from the simple: “I forgot” to “I didn’t have the money” or “My personal life was a mess.” The IRS is in a continual dance with non-filers. It is no surprise that many individuals and businesses slip through the cracks. In some cases the taxpayers are simply shocked that they never get IRS contact at all. Of course honest taxpayers must bear their undisclosed tax burden. The politics involved doesn’t lend itself to a general amnesty for these nonfilers. Instead Congress has provided and the Internal Revenue Code follows an administrative procedure for creating tax returns for taxpayers who refuse to do it themselves. On the surface this may not be a bad thing. IRS wants those returns, so it goes ahead and creates them itself. Once created by the IRS, the agency is free to begin collection of the dollars that may be due along with interest and penalties. This process is known as SFR, substitute for return. What taxpayers may not know is the difficulties they are about to encounter because of this process. Since no tax returns are filed by the taxpayer the statute of limitations never runs. Also in the calculation used by the IRS any tax information that has been sent to it will be used on the income side but no other deductions or allowances will be given. Thus if a taxpayer is actually entitled to sizable credits or losses and other deductions which would have reduced his tax liability to zero, none of them will be applied. These assessments based on the substitute for returns can result in enforced collection action including federal tax liens and seizures as well. Many clients discover that they had been subject to this SFR procedure only when a collection agent or Notice of Lien or Levy appears at their doorstep. The well advised are told to immediately create their own returns and file them with the IRS. In most cases those actual tax returns will be used for the basis of reducing any prior assessments. In a recent bankruptcy case a taxpayer learned some of the hardships that may be encountered because of this process. In Giacchi, 3^rd Cir. the IRS had created substitute for returns for the taxpayer. The taxpayer later filed his own forms 1040 which resulted in reduced taxes that he still owed. The taxpayer never paid those taxes. After several years the taxpayer filed for bankruptcy and argued that the tax liability should be discharged. The appeals court ruled that his filings after IRS had assessed the taxes were not an honest attempt to comply with the tax law. The court determined that they were not returns for bankruptcy purposes and therefore were not dischargeable. Bankruptcy, it will be remembered, is for honest taxpayers with honest debts. Nonfilers should attempt to obtain IRS transcripts to determine whether or not they have been made subject to the SFR procedure.