Despite continuous cuts to IRS budgets and shrinking staffs, the agency remains able to deal with taxpayers who fail to file returns. The law authorizes and encourages it to step in and handle things on the basis most favorable to it.
Code Section 6020 allows the IRS to complete returns and make assessments for taxes, penalties for failing to file, and for late payment of taxes and interest charges. How quickly does an inexorable IRS invoke Section 6020? Only after mailing multiple messages saying that a person had reportable income and didn’t file Form 1040.
How do the feds’ always-alert computers prepare a “substitute for return” for a hypothetical writer we’ll call Fredericka C. Dobbs? And just what caused the feds to focus on Fredericka? She obstinately ignored filing deadlines and shredded unopened letters asking about an unfiled 1040. Their patience ran out; they had their computers create a substitute 1040 only on the basis of her reportable income.
Completion of a substitute was a piece of cake, as Fredericka does editing work for several California companies. The computers located W-2 forms filed by her employers that showed wages and withholding for federal and state income taxes, and information forms from financial institutions revealed payments of dividends, interest, and sales of assets.
The computers never take into account that she’s entitled to claim offsetting amounts. Fredericka’s offsets include:
- Exemptions for several youngsters.
- Hefty write-offs on Form 1040’s Schedule A, where the law allows her to itemize deductions for such payments as California income taxes (more on California taxes in a moment), mortgage interest, and charitable donations.
- Deductions on page one of the 1040 form for, say, moving expenses.
- Deductions on Schedule D for losses on sales of investments.
The computers always base substitute-return calculations on:
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About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.