The IRS has the power to, in effect, prepare and file tax returns whenever you don’t file. (Internal Revenue Code § 6060.) In IRS-speak, this is called a Substitute For Return, or SFR.Usually, it is not to your advantage to have the IRS do this. IRS prepares may give you the bare minimum-one exemption, no dependents, and the standards deduction. The IRS can guesstimate your tax liability, usually from W-2 forms and 1099 informational reports. If these are not available the IRS can impute income to you based on tables from the Bureau of labor Statistics showing income needed to sustain a minimal lifestyle by area of the country. This can result in a much higher tax bill than you would had prepared your owned tax return. If the IRS prepares an SFR, it will mail a copy to your last known address asking you to sign it in and return it. It may not be in your best interest to sign, even if the fugues are accurate. Instead, prepare a return yourself and send it to the IRS with a copy of the SFR. If your return be accepted in lieu of the SFR. If your return looks okay, the IRS will accept it. The IRS can audit it first, but this doesn’t often happen.
Another reason to prepare the return yourself is because the normal statute of limitation rules for auditing a filed tax return don’t apply with SFRs. If the IRS prepares an SFR, it will be able to audit it forever, unless you sign the SFR and agree to the tax liability. But, if you prepare a tax return, the IRS normally has only three years from the time you file it to Audit you. An IRS-filed tax return does not start the normal ten-year statute of limitations on collecting any taxes due.

A final reason for filing your own return has to do with qualifying to discharge (eliminate) your tax debt in bankruptcy.

If you don’t offer your own return, the IRS finalizes the SFR, whether or not you sign it. Any taxes due, plus penalties and interest, will then be formally assessed against you.

It’s Better to File Before the IRS Contacts You

If you haven’t file a tax returned for a year or more, It’s never too late. The IRS has a policy of not criminally prosecuting those who file before they are contracted by the IRS. (IR-92-114.) Also, the IRS is often more gentle in collecting from voluntary filers than from the ones they catch. When you file your return on your own accord, the somewhat remote IRS campus initiallyhandles your file. But if the IRS has sought you out, your local IRS office probably has the file
and can put more pressure on you than a campus.

Example: Uncle Jack worked in construction for 50 years. He bragged that he never filed a tax returned or got an IRS notice. He changed addresses with the seasons and use many different Social Security numbers, none of which were his own. Because the IRS relies primarily on Social Security numbers to keep track of taxpayers, it never found jack. He didn’t get Social Security benefits either. If Jack were around today, His chances of outrunning the IRS computer
would be slim-better than beating the house in Las Vegas, but not by much.

Voluntary Filing to Minimize the Chance of a Criminal Investigation

The government policy is not to prosecute most citizens who haven’t filed. Who does the IRS criminally prosecute? The most likely candidates are public figures, such as sports stars or entertainers or nonfiling and hundreds of thousands in taxes owed. It is usually best for most nonfilers is to simply start filing their tax returns-without first contacting the IRS.

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