Indirect Methods: How the IRS Deals with Taxpayers: Part III

Category: Tax Preparation | Posted: February 24, 2016

The Facts:
a) The 2016 IRS budget keeps the IRS funded at fiscal 2015 levels.
b) The 10.6 billion in funding is 1.7 billion less than the President’s budget.
c) Since 2010, IRS funding has been reduced by 18%.  

What this means to US taxpayers:
13,000 fewer IRS employees, 10,000 fewer enforcement staff, the lowest individual and business audit levels in 10 years, and an average wait time of 23 minutes to receive assistance via phone when calling  into the IRS.

In direct relation, the IRS now resorts to indirect, ancillary methods to assist with the assessment and collection of tax due.  This article explores one of three such methods identified recently by the National Taxpayer Advocate.

Automated Substitute for Return (ASFR) Program

What is the ASFR Program? When a taxpayer who has a tax return filing requirement fails to file a tax return, the IRS can use third-party information (Forms W-2 and 1099 filed by employers, banks, and other third parties) to determine and assess a tax. This process is the ASFR program. The ASFR program treats taxpayers as single (or married filing separately where there is evidence the taxpayer is married) with no dependents, allows one exemption and only a standard deduction.

What are the selection criteria for the ASFR Program? First, there must be an unfiled tax return with the IRS.  Second, the IRS examines a delinquent filing time period and dollar threshold in its Information Returns Processing (IRP) program.  Finally, the IRS prepares an estimated tax return on behalf of the taxpayer based on available information.  

The IRS collects $2.25 for every $1 spent on this program.  

This is in stark contrast to other IRS collection programs that generate $6 to $1 or $20 to $1 returns on investment.

What types of burdens do taxpayers experience when selected for the ASFR program? Taxpayers receive a statutory notice of deficiency post assessment.  The IRS provides taxpayers of their right to petition tax court in the assessment.  Due to the high tax, penalties and interest assessed in combination with a tax court filing deadline there can be two wildly varying reactions.  

First, the taxpayer may “stick their head in the sand.”  This ostrich type taxpayer will then suffer through a very long and drawn out assessment and collection process.  

The “Head in Sand” Taxpayer

Second, the taxpayer may over-react to the notice and make an uninformed or hurried decision on how to respond.  Thus, the taxpayer incurs costly and unnecessary expenses for representation by a Tax Attorney, CPA or both.

What is the best strategy for a taxpayer dealing with this type of situation?

Here are five steps you can take to achieve success:

  1. IRS Correspondence. 
    • This is the first step that many taxpayers miss.  The IRS loves to riddle correspondence with numbers, codes, statutory deadlines, return correspondence address(es), and crucial information needed to secure the taxpayer’s procedural rights.  Having only page 1 of 7 for a correspondence document can lead to missing valuable information.  
    • Word to the wise, you will need all pages of all correspondence to be successful.
  2. Find a CPA. 
    • Not just any CPA but a CPA that has familiarity with the ASFR program.  This can be harder than you think.  
    • Most CPA’s abhor dealing with tax controversy issues.
  3. Make a checklist. 
    • The best defense to an automated substitute for return is to provide a thoroughly prepared original, true, and correct tax return with strong back-up documents and work papers.  
    • Your CPA will ask you to complete a tax organizer and provide documents to assist in the preparation of the tax return.  This can be a daunting exercise. Make a checklist and work on one or two items a day until it is complete.
  4. Get a calendar.  
    • As indicated in the first step, there are certain deadlines and expectations that must be met when dealing with an ASFR situation.
    • Hopefully your CPA is helping you stay on top of these deadlines, but ultimately it is your responsibility.

Ultimately, you need to know your options.  The statutory notice will be provide you with the last day to petition tax court to resolve the matter.  The majority of taxpayers do not understand what this means or how the process works.  Understanding your options should this deadline come to the forefront is critical to making an informed decision.

John Paul Krueger, EA; President & CEO
John (JP) Krueger founded Five Stone Tax Advisers with a passion to help people comply with the complexities of the IRS tax code. Along with compliance, Five Stone also helps clients pay the absolute legal minimum in taxes each year. Five Stone and its related entities have quickly become a leading global tax firm with offices in Zurich, Switzerland and Austin, Texas. Five Stone maintains an industry leading success rate in resolving tax issues for clients around the globe. Prior to starting Five Stone Tax Advisers, JP has led companies in various industries including retail, technology and financial services. At each company he managed, JP’s efforts grew revenue and net income in amounts that far exceeded industry benchmarks. While he now leads over 50 associates in the Austin office, JP’s leadership development began in the United States Marine Corps. An expert in leadership, lean operations, and tax strategies, JP maintains professional licenses including the IRS Enrolled Agent (EA) and Senior Property Tax Consultant (SPTC) designations. JP earned Bachelor’s degrees in finance and information systems management from the University of Idaho. In addition to his work as CEO of Five Stone Tax Advisers, JP also serves on the Board of Directors for Loop 1, Inc. a Global IT company and LifePastor, a community based 501c3 organization. He is also a member of C12 Group, a Christian peer advisory board. JP is married to Kellyn, a Certified Public Accountant and they have two young boys, Luke and Roman. John’s faith and family are a primary focus in his life.

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