Is It Possible That The Balance The IRS Says You Owe Is Incorrect?

Generally the IRS is going to have the correct balances, but there is one instance in which the balance that the IRS has may be incorrect. The way that would happen is if in any particular year the IRS did an SFR, a Substitute For Return or service filed return.

In other words, you, the tax payer, never filed a tax return for a particular year. What happens?

The IRS has information that is reported to them like wage and income information, W2’s, 1099’s for interest and dividend income, 1099’s from having a consulting business or being an independent contractor, a 1099-MISC, a 1099-R pension distribution, or a 1099-B sale of stocks.

So if you don’t file a tax return the IRS is going to prepare it for you.

Generally they will file you as a single person with no dependents other than yourself, when in fact you might be married and have children. They’re going to take all of your income information and put it on the tax return and make no attempt to find out what your itemized deductions are.

If you have stock sales, they will make no attempt to find out what the cost basis of that stock was; they are going to take the total proceeds and call it gain.

If you are self-employed and you get a 1099-MISC, then the summation amount of the 1099’s will be considered income and pure profit. The IRS is not going to make any attempt to deduct legitimate business expenses you truly may have incurred, such as rent, cost of sales, salaries, car expenses, etc.

For example, if you have $100,000 in 1099, they’re going to say you have $100,000 in 1099 income and that’s all taxable, when in fact you may have only made net $50,000 after expenses.

The most common reason why the IRS would have the incorrect balance is because they prepared the tax return for you. They didn’t have all of the information and made no attempt to find all of the information, because it is not their responsibility, so the result is a tax balance that is too high.