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Substitute for Returns, How the IRS Bills You When You Don’t File

The IRS can assess a tax balance against you even if you do not file your tax return. To collect back taxes, the IRS first needs to know the amount you owe. In the absence of a tax return, the IRS files a Substitute for Return (SFR) to determine your tax liability. Using this estimate, they begin collection actions by sending notices before moving on to more aggressive collection efforts.

Where does the IRS get its information?

To estimate a taxpayer’s liability, the IRS gathers information from third party sources such as employers and banks. The IRS does not include any additional expenses or exemptions. This typically means that the taxpayer’s tax liability is higher than it ordinarily would be.

The SFR only allows the standard deduction, one exemption, and the filing status of single or married filing separately. Penalties and interest for failure to file are also added to the debt.

Even if the IRS has filed an SFR, you should file your own tax return with all qualifying credits, deductions and exemptions to lower your tax bill. Usually, the IRS will adjust your account to reflect the changes.

When am I informed of the filing of the Substitute for Return

The IRS will inform you of an SFR through notices. First, you will receive Letter 2566. If you receive this, you should begin resolution efforts to avoid aggressive collection actions.

The IRS then sends the Notice of Deficiency, Letter 3219. This notice advises you of the tax debt, interest and penalties. You have 90 days from the date on the letter to dispute the IRS’ claims.

For larger tax balances or more complicated situations, it is better to seek professional legal help before contacting the IRS. Whatever resolution method you choose, you must make sure that you act early on to avoid additional penalties, interest, and collection action.