By Unghwan Rap Choi, PhD. Esq.
Principal, Tax Law Offices of David W. Klasing
If you or your client has not filed tax returns for many years or maybe never, but you feel that you should get back into the system, and be in compliance with the tax law, there is a right way to do so. But first, you must distinguish between the IRS Non-Filer Program and the IRS Non-Filer Reinstatement Program. You certainly don’t want to volunteer to join the Non-Filer Program, as you will see below
A. IRS Non-Filer Program
The IRS does have a Non-Filer Program. But it is not what you think. It is not a program to help non-filers who have seen the light.
The IRS has the authority to prepare returns for a “nonfiler” which the IRS describes as “any person who fails to submit a return required by Internal Revenue law or regulation at the time prescribed, or makes (willfully or otherwise), a false, or fraudulent return”.
The Nonfiler Program is not designed to provide help to a delinquent taxpayer with a tax return prepared by the IRS. It is designed for the IRS to assess taxes on a nonfiler based on a tax return created by the IRS, to prepare a notice of deficiency based on the tax calculated by the IRS and the tax actually paid by the taxpayer, which of course in the case of a nonfiler would be zero, and to send a notice of deficiency to the taxpayer so that the IRS can start its tax collection activities, including calculating penalties, put liens on the nonfiler’s assets and put levies on his bank account.
The Nonfiler Program is explained in IRS Manual Part 4, Chapter 19, Section 17 (“Nonfiler IRM”).
- The Non-Filer program, also known as SFR (Substitute for Return), and its automated version, Automated Substitute For Return (ASFR) were developed to contact taxpayers who have not filed tax returns voluntarily and for whom income information is available to substantiate a significant income tax liability.
- Internal Revenue Code Section (IRC) 6212 authorizes the Service to send a notice of deficiency when a taxpayer appears to have a filing requirement but does not comply by voluntarily filing a tax return.
IRC Section 6020(b) Certification
- The Service has the authority to prepare returns for any person who fails to submit a return required by Internal Revenue law or regulation at the time prescribed, or makes (willfully or otherwise), a false, or fraudulent return. The return is prepared from the personal knowledge of the Service's employee or from information which can be obtained through testimony or otherwise.
- IRC § 6020(b) provides that the return is prima facie good and sufficient for all legal purposes, however despite this language, for most purposes of the IRC, the section 6020(b) return is not treated as a return filed by the taxpayer. For example be aware of the following:
- The amount shown as tax on an IRC § 6020(b) return must be assessed under the deficiency procedures.
- An IRC § 6020(b) return does not start the statute of limitations on assessment.
- An IRC § 6020(b) return does not stop the Failure to File (FTF) Penalty.
- An IRC § 6020(b) return prepared using the Married Filing Separate (MFS) filing status will not prevent taxpayers from electing a Joint filing status under IRC § 6013(b).
- IRC § 6020(b) pertains to individual income tax returns. Such returns may be automatically generated by the Campus or manually prepared with reports of proposed tax adjustments.
- When the taxpayer has not filed an individual income tax return, the Service needs to create a valid IRC § 6020(b) return to apply the Failure to Pay (FTP) Penalty.
- The Tax Court does not consider a mere assessment of tax or FTP penalty to constitute a "return" under the provisions of IRC § 6651(a) (2) and will not sustain the penalty. Therefore, to sustain a FTP penalty on a taxpayer who has not filed a return, the Service must, IN ALL CASES, properly process an IRC § 6020(b) return according to the following Form 13496 Certification procedures or have the taxpayer sign an appropriate return.
As can be seen above, an SFR stands for “Substitute for Return,” which describes the act of the IRS in creating its own tax return for the nonfiler. That is why the IRSM says that the “Non-Filer program” is also known as SFR (Substitute for Return). While often confused as the substitute return prepared by the IRS, SFR is the act of creating a substitute return, not the substitute return itself.
So technically, it would be incorrect to ask the IRS if it has an SFR for a nonfiler. The correct question would be whether a particular nonfiler has been put in a nonfiler program or he is currently subject to SFR.
Now that we have a clear understanding of what a Non-Filer Program or an SFR actually is, we turn to the issue of reinstating a nonfiler into the system as a taxpayer.
B. IRS Non-Filer Reinstatement Program?
Unfortunately, there is actually no IRS program called a “Non-Filer Reinstatement Program.” What practitioners call an IRS Non-Filer Reinstatement Program is actually based on an IRS Policy Statement.
Internal Revenue Manual 188.8.131.52.18 (08-04-2006) Policy Statement 5-133
- Delinquent returns—enforcement of filing requirements
- Taxpayers failing to file tax returns due will be requested to prepare and file all such returns except in instances where there is an indication that the taxpayer's failure to file the required return or returns was willful or if there is any other indication of fraud. All delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of a Service representative, will be accepted. However, if indications of willfulness or fraud exist, the special procedures for handling such returns must be followed.
- Where it is determined that required returns have not been filed, the extent to which compliance for prior years will be enforced will be determined by reference to factors ensuring compliance and evenhanded administration of staffing and other Service resources.
- Factors to be taken into account include, but are not limited to: prior history of noncompliance, existence of income from illegal sources, effect upon voluntary compliance, anticipated revenue, and collectability, in relation to the time and effort required to determine tax due. Consideration will also be given any special circumstances existing in the case of a particular taxpayer, class of taxpayer, or industry, or which may be peculiar to the class of tax involved.
- Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six (6) years. Enforcement beyond such period will not be undertaken without prior managerial approval. Also, if delinquency procedures are not to be enforced for the full six year period of delinquency, prior managerial approval must be secured.
The main point of Policy Statement 5-133 can be summarized as follows:
- Nonfilers must file the missing tax returns
- Generally, nonfilers will be required to file no more than 6 years of delinquent tax returns, even if he has more years of unfiled tax returns.
- If the nonfiling is suspected to be based on willfulness or fraud, criminal procedures may ensue.
So based on the above, what practitioners call called a “Non-Filer Reinstatement Program” basically means that a non-filer, if the non-filing was not based on willfulness or fraud, can most likely “join” the taxpaying community by filing at most 6 years of unfiled tax returns.
C. What Steps Should a Non-Filer Take When Going through the Reinstatement Process?
If you are a tax practitioner assisting a nonfiler client get reinstated, you must do the following:
Call the IRS Practitioner Priority Service to
- Find out whether the nonfiler client is under the Non-Filer Program (i.e., SFR)
- Request a wage and income transcript for the client
- Find out if any substitute returns have been prepared by the IRS and request them
- Find out if there are ongoing collection activities regarding the client (e.g., whether there is an outstanding judgment against the client) and put a temporary hold on any such collection activities
Once you have received the wage and income transcripts and the substitute returns, if any, then prepare the tax returns for the years in question based on the information received from the IRS as well as information and documentation received from the client. Once the tax returns are prepared, you should have those returns replace the IRS substitute returns with the actual returns prepared.
For your information, the IRS offers the following transcript types (at no charge if requested by the tax payer directly or under POA):
- Tax Return Transcript - shows most line items from your original tax return (Form 1040, 1040A or 1040EZ) as filed, including any forms and schedules. It doesn’t show changes made after you filed your original return. A return transcript usually meets the needs of lending institutions offering mortgages and student loans.
- Tax Account Transcript - shows basic data such as return type, marital status, adjusted gross income, taxable income and all payment types. It also shows changes made after you filed your original return.
- Record of Account Transcript - combines the tax return and tax account transcripts above into one complete transcript.
- Wage and Income Transcript - shows data from information returns we receive such as Forms W2, 1099, 1098 and Form 5498, IRA Contribution Information.
- Verification of Non-filing Letter - provides proof that the IRS has no record of a filed Form 1040, 1040A or 1040EZ for the year you requested. It doesn't indicate whether you were required to file a return for that year. (It is required if you did not file a tax return) • Individuals who file an amended IRS Income tax return