“Nothing concentrates a man’s mind like the prospect of being hanged in the morning.”
- Samuel Johnson -
The New York Daily News reports that day-trader Marcos Esparza Bofill has been hit with a $172,000,000 IRS tax bill:
He failed as a day-trader and barely survived in New York on a beer budget, but Marcos Esparza Bofill has been hit with a $172 million tax bill by the IRS.
Esparza Bofill didn’t file an income tax return for the year he was here swapping stocks – and that’s leading to big problems with Uncle Sam.
The feds tracked his every trade. But because Esparza Bofill never accounted for his losses or expenses in tax filings, the IRS presumed he made a pure profit – a staggering $500 million in income.
This case nicely illustrates the immense collection and enforcement power of IRS’s Substitute for Return (SFR) program.
Despite what the nutroot tax protesters say, you have a legal obligation to file a federal tax return. If you don’t file one, the IRS may file one for you. And, as Senor Bofill will now attest, this can be very ugly.
In short, the SFR is the mechanism the IRS uses to prepare and file a tax return for non-filers.
Here’s how it works:
- When you perform services for someone else, whether as an independent contractor or an employee, your principal or employer is required to report to the IRS the compensation it paid to you during the tax year.
- If you have other sources of income during the year, such as stock or real estate sales, the payors of those amounts are also required to report them to the IRS.
- The IRS, therefore, has a record of at least some of the income you earned during the tax year.
- The IRS uses this income information to determine whether or not you reported it properly on your tax return.
- If you did not file a tax return, the IRS will send you several letters instructing you to file.
- If you still do not file, it will prepare an SFR for you based solely on the income information reported to it.
This is bad news for you because the IRS has no way of knowing what, if any, deductions, losses or credits you may have had that would reduce that income. And, because you did not file, you cannot claim those offsets.
The SFR allows the IRS to make an assessment of tax, penalty and interest against you and begin the enforced collection of that assessment. And because you have not voluntarily filed your tax return, the 10 year statute of limitations on collections does not begin to run. In other words, the IRS has forever to collect an SFR assessment made against you.
The only way you can correct an SFR is by preparing and filing your tax return. The return you file will be treated as a request for audit reconsideration. If the audit reconsideration examiner accepts your return as filed, the IRS will replace the SFR with your voluntarily filed return.
Taxpayers who have a record of ignoring IRS notices rarely ignore the SFR notice.
Regardless of what you think about the ethics of the SFR procedure, it remains a highly effective IRS enforcement weapon.
Our Advice: Because the IRS closely scrutinizes returns filed after an SFR has been filed, it is always better to file your return before the IRS files one for you.
7 responses so far ↓
1 Knox Marlow // Aug 29, 2010 at 1:24 am
He needs to call Roni Deutch!
http://blog.pappastax.com/index.php/2010/08/25/california-sues-roni-deutch-for-heartless-pennies-on-the-dollar-tax-scheme/
2 Peter // Aug 29, 2010 at 9:18 am
Knox,
LOL.
3 An Insider // Aug 31, 2010 at 7:40 pm
Actually, the IRM prevents us from filing SFRs based on income document reports. We’re “supposed” to make third-party contacts to the payors and request cancelled checks to verify the amounts. Then we find where those were deposited and fully account for all received/deposited amounts to ensure we did not miss those income items not reported to us. Then we must attempt to verify expenses reported to us on income documents (mortgage interest, student loan interest, etc.)
Then we make an SFR wish you luck.
4 Peter // Sep 1, 2010 at 8:38 am
An Insider,
Thanks for the info. I noticed you emphasized that IRS agents are in theory “supposed to” do these things. I assume that means in practice they often do something else?
5 An Insider // Sep 1, 2010 at 8:36 pm
The IRM is a static set of rules by which our country’s tax laws are applied to taxpayers during IRS procedures. Anyone with any experience dealing with Revenue Agents, Revenue Officers, or anyone else in the company knows that while the rules are there, our jobs can not possible adhere to all of the regulations. Time constraints do not permit or make sense for it.
In the above instance, often times the SFR is a tool used to initiate cooperation in unresponsive taxpayers. Obviously, if we went through the motions of the IRM for every person that makes it to the point of an SFR in the administrative process, we would waste a ton of time just trying to get taxpayers to contact us. However, in the event that an SFR does not create a taxpayer response to correspondence, and the SFR will be used as a filing, it would not stand up in an appeal without having gone through the IRM’s motions.
Revenue Agents are paid, in part, to decide when these, and all IRM procedures, are necessary. Long story short, your article was accurate in that the SFR is used to spark interest in an apathetic taxpayer. However, it becomes a valid return if the proper procedures are followed, however rarely that may be.
6 Peter // Sep 7, 2010 at 10:57 am
An Insider,
That certainly makes sense.
Usually the IRS uses the SFR just to nudge the taxpayer into filing his own returns.
7 David // Apr 11, 2011 at 8:49 am
I read this and am coming into an issue personaly in NC. In 2010 a bankruptcy was filed by an attorney who told me the past debt was all dischargable. This month a surprise while expecting a tax return came into play. The IRS is now saying a SFR is active and I did not file any tax for 01 & 02, while my attorney searched and showed where I filed a late filing and told me this trumped the IRS filing for me and is didshargable. Can you direct me to someone who may help me?
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