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What is an IRS Substitute For Return?

Are you one of the thousands of taxpayers who did not file their federal tax returns last year? If so, there’s a good chance the IRS may file one for you. Under Internal Revenue Code § 6020(b), the IRS has the authority to file tax returns for delinquent taxpayers as part of the Substitute for Return (SFR) program.

What is a Substitute For Return?

A Substitute for Return, otherwise known as an SFR, is a tax return that is generated based on third-party information provided to the IRS. This typically includes income information derived from a W-2 or 1099. It will not, however, include any tax credits or deductions you may be eligible to receive. Additionally, the IRS will use the filing status of single or married filing separately and only take the standard deduction. It will not itemize. This may lead to a much higher tax liability than if you had filed on your own.

If your tax return is more than 12 months delinquent, the IRS can file an SFR to assess your tax due (including penalties and interest) and begin the collection process.

The Substitute For Return Process

The Substitute for Return process begins when the IRS receives information that you may have a filing obligation but there’s no record of your return in its system. The IRS will then send several notices alerting you that you need to file a return. If you ignore these requests, the IRS will then file an SFR. When this happens, you’ll receive IRS Notice CP2566, alerting you that the IRS calculated your taxes (including interest and penalties) based on wages and other income reported to them.

You will then have 30 days from the date of the assessment letter to either:

  • File a tax return for the year(s) indicated; or
  • Call the IRS explaining why you aren’t required to file; or
  • Sign and date the Consent to Assessment and Collection form and return it to the IRS.

If you do not reply within the 30-day time limit, the IRS will send a CP3219N, Notice of Deficiency (90-day letter). This certified letter will detail your available next steps, including calling the IRS if you believe you are not required to file, filing your tax return no later than 90 days from the date of the notice, or challenging the deficiency determination in the U.S. Tax Court.  If you agree with the IRS’s calculations, you may also file a Consent to Assessment and Collection.

Do not ignore CP3219N. If you don’t respond, the IRS can proceed with collection actions. This may include tax liens, levies, and wage garnishment.

Next Steps

Once the IRS indicates that it plans to file a Substitute for Return, your best option is to file your tax return immediately. You will likely lower your tax bill by filing a return that includes all your eligible tax credits and deductions, as well as the appropriate filing status. It’s important to note that you only have three years from the original filing deadline to claim a refund for withholding or estimated taxes. The same rule also applies to tax credits such as the Child Tax Credit or Earned Income Tax Credit. If you owe taxes, filing will also delay collection actions while the IRS processes your return.

It’s a good idea to consult with a tax professional, as well. The IRS will generally scrutinize any tax returns filed to replace the SFR. A tax specialist can help you properly prepare your return. In the event you are unable to pay your tax bill in full, they can also assist with setting up an installment agreement or applying for other types of tax relief.

If you need assistance navigating the SFR process, call Tax Defense Network at 855-476-6920. We’ve helped thousands of clients with their tax problems and offer a free, no-obligation consultation.