IRS Substitute for Return Program

November 20, 2017

The IRS has many tools at its disposal for those “gotcha” moments.  One such tool is a Substitute for Return (SFR).  If a taxpayer does not file an income tax return, but the IRS was sent information about the taxpayer (W-2, 1099, 1098), the IRS has a basis for creating a tax return for that individual.  Now, this is where their sense of humor comes out in an otherwise seemingly humorless agency.  They take every bit of gross income that came in on reports, ignore any deductions and tax it at the highest rate.  Then they assess the tax.  So now a return and a tax liability have been created.  And what is the statute of limitations on the tax liability created by this return?  Is it the usual 10 year statute for collections?  That’s a trick question.  Because the taxpayer did not file a return, there is NO statute of limitations.

How does a taxpayer change this unfortunate result?  File a true tax return asap.  It will take the IRS a while, but they will eventually use the return that you sent in as the actual return.  And filing that return starts the tolling of the 10 year statute of limitations on collection.  The real purpose behind the SFR program is to force the taxpayer to get their returns in to the IRS.  So what is new that makes this program any more noteworthy right now than at any other time?  This program is mostly automated at the IRS.  The IRS has recently announced through a report from the Treasury Inspector General for Tax Administration that this program will be significantly cut back due to budget constraints.
Its use had already been scaled back.  For example, from June, 2010 through July, 2011, the program brought in $3 billion.  But for the period from June, 2015 through July, 2016, the program only brought in $430 million.  We are in an era where Congress has made tremendous cuts to IRS funding.  The results of these cuts can be seen throughout the Agency and in lower audit rates.  Collections and criminal cases are down.  But does it make sense to continue to cut the IRS budget?  According to the IRS, it costs them 35 cents for every $100 of tax revenue that they bring in.  If accurate, that is an incredible ROI.  Maybe the folks in Washington who control the IRS budget know something that we don’t know.