Home > Research Legal Advice > Tax > When the IRS reconstructs your income (substitute for return), is their ...
Asked almost 3 years ago - Miami, FL
FlagDoes the IRS have to base their reconstruction on some reasonable data source and forensic method of income reconstruction? Or is the rule that "anything goes" and the taxpayer always has to prove them wrong, even if (a) their reconstruction ignores known material facts, (b) their reconstruction is vague and does not describe how they arrived at their income figure, and (c) their data sources are unreliable.
The IRS files a substitute for return when the taxpayer has failed to file a return on his/her own. What they do is they take all the income that has been reported as paid to you, give you credit for the standard deduction (assuming you are not phased out) and charge you for the tax on it. If there is no income reported, but the IRS has reason to believe that you earned income from other sources and didn't report it, they can issue you constructive income, but this would be done during the course of an audit or investigation, not on a substitute for return.
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. Answering this question does not create an attorney-client relationship or otherwise require further consultation.
No the rule is not "anything goes". Normally, the IRS will create a return when the taxpayer has failed to file. The IRS will use whatever information is available that demonstrates receipt of income (receipt of cash is typically treated as income by the IRS irrespective of the true nature of the cash receipt) and then reduce income received by the standard deduction. The taxpayer is, of course, given notice of the return prepared by the IRS. The taxpayer can rebut the IRS return by filing a return for that year. This should bring the matter to an end, unless of course, the IRS chooses to audit the return filed by the taxpayer in response to the IRS constructed return. In addition, please note that the IRS return will always be vague. However, the taxpayer can always file a return and essentially make the IRS return null and void, ab initio. Thereafter, the accuracy of the taxpayer filed return will turn on the evidence gathered at an audit. Handling the IRS during the audit process is another matter entirely. It is important that the taxpayer provide the documentation requested by an IRS document request, while at the same time asserting any and all legal defenses to the production of documents, if their non-production is concluded to be important to the case (ie. the potential of a criminal referral to cid).
I call Service prepared returns "attention getters." You always have the option to file your own return to give the Service the correct return. If you do not and you do not contest the return prepared, the tax indicated on the IRS prepared return will become an assessment, and the IRS will begin collection procedures against you. So take their return seriously, and if you do not agree with it you should prepare your own return.
Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.
Don't speak legalese? We define thousands of terms in plain English.
Browse our legal dictionary