Most of us in the tax world have come across a client account where an estimated tax return has been filed on behalf of the taxpayer, also referred to as an “SFR” or “Substitute for Return.” Why does this happen? When does this happen? And most importantly, is it always a bad thing??? Let me shed some light on this tax topic…

The Why: First, as we have reviewed in prior blogs, our tax system at the federal and state levels relies on taxpayers “voluntarily” submitting an annual summary of their financial activities, including what the tax consequences of those activities are. They say “voluntary,” but we all know there is a threat to us, the ordinary taxpayers, for not following through with this annual requirement.

The When: When we don’t file a tax return, the tax agencies have the right to use any financial information reported on your behalf (W-2s, 1099s, gambling winnings, etc.) to compile an “estimated” tax return on your behalf. It usually takes the tax agencies four to six years to follow through with this process, but unless you have the blessings of a god that causes your data to fall through the government’s data cracks, it will inevitably happen. When they compile a tax return on your behalf, they do so in a very straightforward manner without consideration for any tax breaks or credits you should qualify for, leaving your tax assessment to fall into the highest tax bracket they can squeeze it into.

Is it Always A Bad Thing? Not necessarily! In fact, in some cases, it can be beneficial. ***And before I go any further, please note that we are not advocating this as an everyday tax strategy… we are simply reporting the facts as they play into addressing a past-due tax account for resolution.*** Let me explain with a case study…

We had a client retain our services who had not filed an annual income tax return for the prior ten years. Let’s refer to the couple as Mr. and Mrs. X.

Mr. X had always handled the couple’s finances, including the submission of their annual income tax returns. For the last ten years he was alive, Mr. X. was the sole earner for the household aside from the Social Security benefits they were both receiving. Mr. X had recently passed away, and Mrs. X learned of the unfiled returns a few weeks after his passing when she was going through some papers in his home office. Mrs. X. found stacks of notices from the IRS and sat down with a CPA friend for counseling on what to do. Here is a summary of what they found:

• 2013 – an SFR in Mr. X’s name was compiled, reflecting $5,724 in tax owed
• 2014 – an SFR in Mr. X’s name was compiled, reflecting $6,506 in tax owed
• 2015 – remained unfiled with no SFR compiled
• 2016 – an SFR in Mr. X’s name was compiled, reflecting $8,999 in tax owed
• 2017 – an SFR in Mr. X’s name was compiled, reflecting $6,641 in tax owed
• 2018-2022 were unfiled and did not yet have SFRs compiled

Mrs. X’s CPA reached out to Golden Lion Tax Solutions to talk about the case and to help assess how to proceed to a resolution. We filed our Power of Attorney forms to access the account records and contact the Collections Division of the IRS to determine which returns were being requested and to secure a hold of any enforced collection activities based on the history of events in Mr. and Mrs. X’s life. We were told that the IRS was actively seeking the tax returns from 2017 forward and that a collection hold would be granted for thirty days to assess how we would begin addressing the account.

The CPA used the financial records available to create tax returns from 2013 through 2022, and for the years that had SFR returns compiled, these were the results of the CPA’s calculations:

• 2013 – tax return reflected a tax owed of $8,324
• 2014 – tax return reflected a tax owed of $7,265
• 2015 – tax return reflected a tax owed of $3,818
• 2016 – tax return reflected a tax owed of $6,384
• 2017 – tax return reflected a tax owed of $3,177

Based on this data, we elected to proceed in the following manner:

• We chose not to file the correct 1040’s for 2013 and 2014, as the SFR returns reported a lower tax balance each year.
• We chose not to file 2015 as the IRS did not require that return to be filed before proceeding to a resolution on the account.
• We chose to file the correct 1040’s for tax years 2016 and 2017 to lower the assessed tax balances owed, thereby also reducing the penalties and interest accrued on the estimated balances.
• We filed the missing returns for 2018 through 2022 to allow Mrs. X to establish an Installment Agreement to address the total tax balance owed.

When it comes to SFRs, it’s not always the worst outcome. Before you rush to file a tax return to correct an SFR, slow down and look at the situation from both sides. The IRS will always allow an SFR to stand as a formally recognized balance. However, do your due diligence to determine if filing a tax return properly will be more advantageous for you and the tax debt you need to begin tackling with a resolution plan.

If you or your client has a similar situation, contact the Golden Lion Tax Solutions team. With almost 25 years of dedication to focusing solely on tax debt resolutions for their individual and business clients, we have the firsthand experience needed to efficiently and effectively solve tax account concerns and return your peace of mind!

--

Trust. Protection. Wisdom.

Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.

For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.