We recently received good news from the IRS that it reversed a tax assessment in excess of $200,000 for back taxes against our Boca Raton client.
Needless to say our client was extremely happy with the outcome as he and his wife had many sleepless nights stressing over their IRS tax problems. They were especially fearful of an IRS wage levy which would leave the husband with a significantly reduced take-home paycheck.
The back taxes were assessed because the taxpayer had failed to file his 2010 tax return. When you fail to file your tax return, the IRS will eventually prepare a return for you. This return is called a Substitute for Return (SFR) and is based on information reported to the IRS by third parties. When the IRS prepares an SFR it will not consider all your allowable expenses and may not use the proper filing status, resulting in an overstatement of your tax liability.
The most common method to deal with an SFR is to file an original tax return and submit it for audit reconsideration. We reviewed the SFR to determine the items that caused the tax assessment. In addition to the taxpayer’s wages the IRS included cancellation of debt income and income from an S corporation on the return.
The cancellation of debt income was from the foreclosure of the taxpayer’s principal residence and thus excludable from taxable income. We prepared and included the appropriate form with the tax return and provided adequate documentation. Based upon this information the IRS removed the debt cancellation from income.
As a result of a mistake or fraud the S Corporation reported income to the taxpayer when it actually incurred a loss. Again we attached the appropriate form to the return with a detailed explanation and the IRS reduced the reported income to zero.
The taxpayer was a sales manager covering a large area of South Florida and incurred a significant amount of unreimbursed travel expenses which we deducted as it was not included in the SFR prepared by the IRS.
Finally, the return we prepared for the taxpayer was a joint return with his wife and he claimed an exemption for her. The IRS had used the filing status of married filing separately which results in higher tax rates.
The above adjustments not only relieved the taxpayer of a $200,000 back tax bill but resulted in a small refund. If you live or work in Boca Raton or elsewhere in Palm Beach or Broward Counties and need help with back tax problems call us today at 561-826-9303 for a free consultation.