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Tax Repair Experts » Substitute for Returns
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Archive for the ‘Substitute for Returns’ Category

Substitute for Returns

Monday, June 4th, 2007

The IRS’ top revenue producer, contrary to popular belief, is not the assessments made by their auditors.  A much more efficient system for generating revenue is their document matching program.  When your employer, business customers, stockbroker or bank sends you a Form W-2 or Form 1099, they simultaneously send a duplicate copy to the IRS.  Using a highly automated process, the IRS computers match each incoming document to the individual (or business tax return) on file with your social security number.  The sophisticated software can actually find your filed tax return, compare the income that you reported on the return, prepare a reconciliation schedule with the documents received and even go so far as to prepare a final audit report with the required additional tax due for any shortfalls detected.  Almost ALL of these processes take place untouched by human hands! 

If you have not filed a tax return, the computer will discover that there is none in the system for matching purposes and create one for you.  This computer generated return is referred to as a “Substitute for Return (SFR)”.  The SFR process, however, does not allow for ANY DEDUCTIONS for the income sources it receives from employers, banks, stockbrokers or your business customers.  

Example 1:  You sold stock in the year 2006 for $50,000, which you purchased for  $55,000. The correct taxable transaction should be a net capital LOSS of $5,000 with no tax consequence.  To the contrary, when the computer creates a substitute for return (SFR), you will be charged with a $50,000 gain (no deduction is allowed for the $55,000 you spent to buy the stock).  

Example 2: Another harmful illustration would be where you have a business for which your clients issued Form 1099s that total $70,000.  Again, there are no records submitted to the IRS for business expenses, so the substitute returns program will show a Schedule C business with $70,000 income and NO EXPENSES thereby resulting in a net taxable profit of $70,000.  The self-employment taxes alone would total approximately $10,000.  The NO DEDUCTION tax computation for SFRs applies to business income, stock sales, rental activities and any other revenue sources.   

What Can Tax Repair Experts Do For Me?

 It is highly likely that the engagement of a skilled representative from Tax Repair Experts to challenge the substitute returns assessment will result in a SUBSTANTIAL decrease in taxes due.  As former IRS employees, they have the insight to assist you with the preparation of a delinquent return including:

  1. Immediate Procurement of All IRS Documents - The IRS computers rely on a document-matching program called the Information Returns Program (IRP).  As a starting point, our staff will secure a detailed listing from the IRS of the exact same information their computers used to prepare your substitute for return.

  2. Organization of Records – We will assist you with the organization of your records and help prepare an accurate tax return.

  3. Location of Missing Records - If you failed to keep records for business expenses, we can help pinpoint key third party contacts to secure duplicate copies.

  4. Determination of Reasonable Expense Estimates - If you are unable to secure documents from third parties, the IRS allows reasonable estimates of business expenses when the original records are no longer obtainable.  As former IRS employees, our professionals can assist you determine reasonable estimates.  Keep in mind that most IRS auditors feel no obligation to assist you with this process, hence in most cases, without the assistance of a skilled professional, you are on your own.

  5. Preparation of an Indirect Method For Inadequate Records Cases - If you have no records, the IRS uses an “indirect method” for determining your net profit.  Once again, having previously worked for the IRS, our professionals are fully trained on indirect methods and will ensure that the tax you pay is fair.