The IRS uses a variety of methods to force compliance. ACS employees may contact neighbors, employers and others in an attempt to secure information about the taxpayer’s potential tax liability.
The IRS will eventually create tax returns from all information available to them under the Automated Substitute for Return Program (ASFR). The SFR Program and its automated version (ASFR) were developed to deal with 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. Thus the substitute return that they create is followed by two letters that are issued to the taxpayer at their last known address, a 30-day letter and a 90-day letter. These letters request the taxpayer file a return or explain why they are not required to file. The letters include a list of income information reported to the Service and the proposed tax assessment, which shows how the Service will assess tax if no return is secured. If a return is not received by the end of the 90-day period, the account defaults and an assessment is made. An income tax deficiency is assessed if the taxpayer does not file a petition to Tax Court. The government will then attempt to seize the non-filer’s wages, bank accounts and business assets in satisfaction of the deficiency assessed on the substitute return.
These Substitute For Returns (SFR) often lack the information a taxpayer would have included on a filed return. For example, the IRS will take the sum of the 1099′s received on a self-employed non-filer and subject the total of the 1099′s to income and self-employment tax. Since no deductions are provided by the taxpayer and are not known to the IRS, the resulting tax liability and associated penalties and interest are quite often grossly overstated.
Additionally, SFR’s are often overstated because the non-filer is only credited with their own personal exemption even where they are married and have children; moreover non-filers are not allowed itemized deductions like mortgage interest, state or property taxes, charitable contributions or health care expenses.
