IRS Audit and Tax Returns
If the requested return(s) isn't filed, the IRS has the authority to file/audit the tax return all in your name. The IRS employee tasked with this job is directed by the Internal Revenue manual to calculate a “reasonable and substantially correct” return.
The auditor who is creating this return can rely on the income information reported like w-2 and 1099 income, but he can also rely on other sources to estimate your income and expenses.
This is common when the income reported doesn't seem to match your living arrangement.
Think…gated community and large home with only $20,000.00 of reported income.
For businesses with unfiled returns, the auditor uses sources that provide him “industry standards”. He can actually estimate what he thinks your business may have earned and spent on overhead by comparing your business to other business' similar in age, purpose and size.
After the auditor is all done estimating your income and budget items, he will forward a copy to your last known address and give you the opportunity to dispute with figures of your own or provide your own correct return or he may simply issue a notice of deficiency and provide you 90 days to contest the report in Tax Court.
Once the dates are missed and the auditor created return is “assessed”, the new “substitute” return can be used by the IRS collection department as a basis to levy a paycheck or bank account.
This process is the most common problem my clients face; i.e. a number of years of unfiled tax returns, a few of which have been done by the IRS as substitute returns, and subsequent collection activity.
If you have been putting off the creation of unfiled returns and you earned money during the years in question, it will be cheaper and probably much easier to beat the IRS to the punch before you are…audited.