At the end of each year, employers and others are required to send the IRS documentation telling it how much money was paid to you. The document these entities send may be a W-2 Form, or a 1099 Form containing contractor, interest or dividend income, mortgage interest or retirement account information.
These documents are matched up with your Social Security number and saved in a database. Every once in a while the IRS' Computer does a search to see whether you have filed a tax return for a given year or to see whether the tax return you filed matches the income information it received for that year.
If the Computer recognizes that you did file a return but that the information in the return doesn't match the information it was provided, it will shoot out a letter to you. That letter will tell you that it's intent is to change your return to match the reported info.
If the Computer doesn't see a return, and your income was high enough that a return was required, it will send a letter asking you to file the return. It sends this letter to the last known address it has on record for you.
If you don't get the letter, which is very common, or you do get it and you ignore it, the IRS Computer will prepare a return called a Substitute for Return or “SFR”, using the information on record and treating as single or married filing separate with no deductions. It will than send another telling you that if you don't file a return or challenge the one it has created within 90 days, the amount from it's return will become “assessed” or set in stone. Once that happens, the IRS collection process begins.
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SFR's really stink and for a number of reasons.
First, the SFR doesn't credit you for any deductions you may have had in that year, or any business expenses if you needed to do a Schedule C. There are also no deductions for dependents. As a result, the SFR is calculated at the highest possible amount.
Second, If the SFR is assessed before you file your return, the principal portion of the debt is never going to be dischargeable in Bankruptcy should that become necessary.
Third, if the SFR is assessed before you complete your own return and file it, you MAY have to deal with the IRS based on the incorrect SFR debt amount while you are waiting to see if the IRS accepts your correct tax return.
If you haven't filed for a while, get the returns done asap in order to avoid this entire mess. If the SFR's have been assessed by the IRS, it will attempt to collect.
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