Example 1
Part 1:
In this example, Taxpayer A did not file a tax return in 2004 and subsequently received a letter from IRS with a proposed assessment. Since the IRS does not know each taxpayer’s individual circumstances unless a return is filed, it computes a proposed assessment using taxpayer information provided from various corporate and private industry sources customarily received about U.S. taxpayers (e.g. wages, interest income, dividends, etc.).
Because Taxpayer A did not file a 2004 tax return, the IRS computation will not include any credits, dependents or other deductions. The only way for Taxpayer A to claim any of these benefits is to file a tax return. For example, the IRS does not assume any of the following based on prior information.
- Whether you are still married although you filed prior returns with your spouse.
- Whether you are entitled to the same exemptions (children/other dependents) you took in prior years.
- Whether you are entitled to claim credits, dependents and other deductions based on prior year returns.
IRS Proposed Assessment (Based on Information Available to IRS)
Since Taxpayer A did not file a 2004 tax return, the IRS automatically generated a tax return for Taxpayer A.
Although Taxpayer A filed a married joint return in 2003, the IRS cannot assume taxpayer A is still married and intends to file a joint return in tax year 2004.
Taxpayer A information available to IRS at the time of generating the substitute return includes: Wages: $39,710, Interest Income: $57, Non-Employee Compensation: $1,035 and Federal Withholding: $2,877.
Adjusted Gross Income: |
$40,728 |
Taxable Income: |
$32,778 |
Total Tax (tax table for married filing separately): |
$5,078 |
Prepaid Credits (federal taxes withheld): |
($2,877) |
Balance Due (total tax minus prepaid credit): |
$2,201 |
Interest and Penalties: |
$994.28 |
Total Balance Due: |
$3,195.28 |
The IRS proposes a tax balance due of $2,201.00, plus interest of $300.97 and penalties of $693.31 for, total balance due of $3,195.28.
Part 2:
Part 2 of this example shows that by Taxpayer A filing the 2004 return, he/she is eligible to claim all applicable credits, dependents and other deductions.
Taxpayer A‘s information when filing the 2004 return includes: Filing Status: Married Filing Joint, Exemptions: 5 (self/spouse/two children/parent), Wages: $67,321 (self $39,710; spouse $27,611), Federal Withholding: $4,319 (self $2,877; spouse $1,442), Total Schedule A: $11,968, Child Care Credit: $277, Child Tax Credit: $1,000, and Education Credit: $1,500.
Taxpayer A: 2004 Assessment (Based on Taxpayer 2004 Filed Income Tax Return)
Adjusted Gross Income |
$68,342 |
Taxable Income |
$40,874 |
Total Tax (tax table for married filing jointly) |
$5,412 |
Credits (child tax, child care, education) |
($2,777) |
Prepaid Credits (federal taxes withheld) |
($4,321) |
Refund Due (total tax minus prepaid credits) |
($1,686) |
Interest and Penalties |
$0 |
Refund Due: |
$1,686 |
Based on Taxpayer A filing the 2004 tax return, the IRS proposes a refund of $1,686. It is clear that by filing the tax return, Taxpayer A is now entitled to a refund.
Example 2
Part 1:
In this example, Taxpayer B did not file a tax return in 2004 and subsequently received a letter from IRS with a proposed assessment. Since the IRS does not know each taxpayer’s individual circumstances unless a return is filed, it computes a proposed assessment using taxpayer information it secured from corporate and private industry sources customarily received about US taxpayers (e.g. wages, interest income, dividends, etc.)
Because Taxpayer B did not file the 2004 tax return, the IRS computation will not include any credits, deductions or other dependents. The only way for Taxpayer B to claim any of these benefits is to file a tax return.
IRS Proposed Assessment (Based on Information Available to IRS)
Since Taxpayer B did not file a 2004 tax return, the IRS automatically generated a tax return (substitute return) for Taxpayer B.
Taxpayer B information available to IRS at the time of generating the return includes: Filing Status: Married Filing Separate, Exemptions: 1, Wages: $71,396, Miscellaneous Income: $1,400, Interest Income $140, Adjusted Gross Income: $72,936, Standard Deduction: $4,850, One (1) Exemption: $3,100, Taxable Income: $64,986 and Federal Withholding: $3,899.
Adjusted Gross Income: |
$72,936 |
Taxable Income: |
$64,986 |
Total Tax (tax table for married filing separately): |
$13,172 |
Prepaid Credits (federal taxes withheld): |
($3,899) |
Balance Due (total tax minus prepaid credit): |
$9,273 |
Interest and Penalties: |
$6,223.23 |
Total Balance Due: |
$19,310.67 |
Based on information available to the IRS, the IRS proposes a balance due of $9,273, plus interest of $2,143.11 and penalties of $4,080.12, for a total balance due of $19,310.67.
Part 2:
Part 2 of this example shows that Taxpayer B filed the 2004 tax return and by filing the return, Taxpayer B is eligible to claim all applicable credits, Schedule A deductions, and exemptions.
Taxpayer B’s information when filing the return includes: Filing Status: Married Filing Jointly, Wages: $71,396, Miscellaneous Income: $1,400, Interest Income $140, One Half SE Tax: $99, Adjusted Gross Income: $72,837, Schedule A Deductions: $17,123, Exemptions: $12,400 (4 exemptions), Taxable Income: $43,314, Federal Withholding: $3,899, Child Tax Credit: 2000 and SE Tax: $198.
Taxpayer B: 2004 Assessment (Based on 2001 Taxpayer Filed Income Tax Return)
Adjusted Gross Income: |
$72,837 |
Taxable Income: |
$43,314 |
Total Tax (tax table for married filing jointly & SE tax): |
$5,982 |
Credits (child tax, rate reduction): |
($2,000) |
Prepaid Credits (federal taxes withheld): |
($3,899) |
Balance Due (total tax minus prepaid credits): |
$83 |
Interest and Penalties: |
$55.71 |
Total Balance Due: |
$138.71 |
It is crystal clear that when the IRS generated the 2004 return, the balance due plus penalties and interest amounted to $15,496.23. However, when Taxpayer B filed the return, the balance due, plus interest and penalties, amounted to $138.71, for an enormous savings to the taxpayer of $15,357.52.
References/Related Topics
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