IRS Substitute for Return: What Happens When the IRS Files a Return for You?

Statistics from 2023 show that individual taxpayers collectively owe over $316 billion to the IRS in overdue taxes. Many of these taxpayers failed to ever report their taxes, and in these situations, the IRS has the right to generate a substitute for return on their behalf. These tax return estimates often greatly overestimate what you owe, so if you receive an SFR from the IRS, it’s in your best interest to research your options before settling your tax debt. Depending on your specific tax situation, you could be facing other tax collection efforts, too. Below, we’ll go over exactly how to respond to a substitute for return from the IRS and how to get in touch with a tax resolution professional to navigate complex tax matters.

What is a Substitute for Return?

A substitute for return (SFR) is a tax return drafted by the IRS for taxpayers who haven’t filed their returns. This tax return outlines your financial situation and tax obligations based on the information the IRS has on file for you or obtained from other sources. SFRs are not filed by someone who is carefully considering your unique circumstances. Because of that, you will not receive any favorable credits or deductions. You’ll also automatically get categorized as either single or married filing separately. That means you won’t get the benefits of potentially filing for head of household. As U.S. citizens and residents, we all have the obligation of compiling our financial records and submitting our tax returns to the IRS and the state tax authorities each year. Despite this legal obligation, many Americans fall behind on reporting their taxes. Fortunately, the IRS will give you ample opportunities to correct the issue, but if unfiled tax returns continue to go unaddressed and you ignore communication requests such as a Form 15103 from the tax agency, the agency will escalate the situation by filing an SFR. In general, filing your own return is almost always going to result in a better overall tax outcome than if you accept the results of an automatically generated SFR.

Where Does the IRS Get the Authority to Issue SFRs?

We know what you’re thinking — can the IRS legally file a tax return for you? In short, the answer is ‘yes’. The IRS has the authority to both prepare and execute a tax return on a taxpayer’s behalf under Sec. 6020 of the IRS tax code. Further, Sec. 6020b(1) gives the IRS the additional authority to utilize information in the agency’s possession from other sources to prepare the tax return for the taxpayer. In plain English, that means if the IRS has W2s, 1099s, or other income documents for you, the agency can file a tax return on your behalf.

What to Know About Letter CP3219N

If the IRS has generated an SFR on your behalf, you will likely receive Letter CP3219N in the mail from the IRS. You will receive this notice if you didn’t file a tax return in the year in question. You might also get this notice if you failed to report income associated with your Social Security number and it was reported to the IRS by someone else. This letter outlines that the IRS utilized the information they had to prepare a tax return for you. It also informs you of the proposed tax assessment, including any accumulated penalties and interest. The letter explains that you have up to 90 days from the date on the notice to challenge the proposed assessment. If you don’t challenge the assessment, you will receive the bill for the amount listed in the letter.

Other Notices Related to SFRs

The IRS will send you a plethora of letters, especially if your case has progressed to the point of receiving a substitute for return. Here are just a few common forms that you may have received related to your SFR or prior to it:

• CP3219A (Notification of an increase or decrease in tax)
• CP14 (you owe money on unpaid taxes)
• CP501 (notice of a balance due on a tax account)
• CP503 (notice of delinquency, second notice)
• CP504 (notice of delinquency, third notice, intent to levy refund)
• CP2051 (notice of information received that wasn’t reported on your return)

If you have any questions about a letter you receive from the IRS, then you can always utilize the form’s number to help you understand its meaning.

Your Expected Timeline with a Substitute for Return

When you owe the IRS a hefty sum of money, you can bet that the agency has an interest in collecting what you owe. The expected timeline from the first time you’re notified about unfiled returns to the point you get issued an IRS SFR will vary based on the unique circumstances and facts of your case. In general, though, the IRS won’t utilize an SFR until you’ve been delinquent for a few years. First, the IRS will send you notices that you need to file your returns. Over time, they will continue to send you notices about your delinquent returns. Failure to respond to these notices means they will eventually send a notice of proposed adjustment. This will show the agency’s calculated tax liability, which you owe based on an SFR. You have 30 days to respond or appeal the decision. If you still do not make contact, then a notice of deficiency will be sent. You have 90 days to respond. If you don’t contact the agency, then the assessment is finalized. The IRS has a general “six-year” rule for assessing taxes on income you should’ve reported, but this isn’t a strict requirement. Legally, there is no statute of limitations on unfiled returns. Thus, the IRS can go back in unlimited amount of time. However, if you come forward voluntarily, the IRS usually only makes you file the last six years of returns even if you missed more years than that.

What to Do If You Receive an SFR

If you receive an SFR notice, you need to first carefully read through the letter and verify the accuracy of everything mentioned in it, including your personal identifying details. If you notice any errors, you could’ve received the letter in error. Otherwise, you’ll want to read the letter thoroughly, consider your options, and decide how to respond.

When to File an Amended Return

Once you receive an SFR, it’s almost always in your best interests to file a correct tax return. Since the SFR doesn’t consider filing status, deductions, credits, business expenses, or other things that could potentially reduce your tax liability, it’s rarely better to stick with the automatic assessment. If you’re concerned that filing a return to supersede the SFR could impact you negatively, it might be best to talk to a tax lawyer. In rare cases, you may want to allow the SFR to stand. For instance, if you’re applying for an offer in compromise, you may be better off applying for the offer on the tax debt shown on the SFR and not wasting time or money to amend those years. However, that depends on your unique situation.

When to Accept an SFR as Filed

Another option you have after receiving the letter is to accept the SFR as filed. To do so, you’ll need to sign your Consent to Assessment Collection form and file it with the IRS. You’ll want to accept an SFR as filed when you don’t have any corrections that would reduce your tax liability or benefit you in any way.

What to Do If You Disagree with the SFR

If you disagree with the SFR assessment, you should file your own correct return. If you disagree with the SFR being assessed in the first place, you should contact the IRS directly and sort out the mistake. This is the best option when you’ve been assessed in error, or you weren’t obligated to file a return in the year in question. For instance, this can often happen to people with self-employment income. Per the IRS’s rules, you don’t have to file if you have less than $400 in net self-employment income. If the IRS has a 1099 that shows $5,000 in income, the agency may think that you need to file. However, if you can prove that you had more than $4,600 in expenses and thus your net income was below the threshold, you can reach out and establish that you weren’t required to file.

What are Your Rights to Appeal or Audit the IRS’s Decision?

If you disagree with the SFR IRS assessment of your tax liability, you have the right to file an amended report to correct the issue. You only have a short period of time (90 days) to act. After that, the assessment becomes final. You also have the right to challenge the IRS in Tax Court.

Is it Time to Hire a Tax Professional for Help?

It might be time to hire a tax professional for help if you’re potentially facing serious collection efforts as a result of your tax status. The IRS is provided with significant authority, including the ability to seize property in your name, take a percentage of your paycheck, or even seize money you have in your bank account. If your assessment suggests that you owe an unreasonable amount to the IRS or you simply aren’t sure how to successfully navigate your tax matters, then it’s time to get in touch with a tax resolution firm.

Payment Options if You Can’t Afford to Pay the Tax Due

You’re not alone if you cannot afford to pay off your entire tax bill in one lump sum. Don’t let your inability to pay prevent you from filing your return and getting in touch with the IRS. One of the most common solutions to this type of problem is agreeing to a payment plan with the IRS. Arranging an installment agreement means that you’ll need to make regular payments on your debt until it is paid off in full. So long as you do so, the IRS will agree to stop pursuing further collection efforts against you. You might also have other relief options available to you depending on your situation. You could be eligible for penalty relief, an offer in compromise, or another type of option based on your financial ability to pay.

What Happens if You Ignore the SFR?

If you ignore the SFR, the IRS will finalize its assessment and move forward with collection efforts. That means the tax agency may decide to initiate collection proceedings against you. These collection efforts might include a seizure of your property or wage garnishment. There is no unfiled tax returns statute of limitations, which means the IRS can assess and collect a tax if no return has been filed. Once a return has been filed, however, the IRS only has up to 10 years to collect on that debt.

IRS Substitute for Returns in 2024

As of 2024, the IRS has announced plans to issue SFRs for taxpayers who have unfiled returns going back to 2017. During the COVID pandemic, the IRS stopped many collection actions, including contacting people about unfiled returns. In 2024, the agency started sending out notices again. It also announced plans to target individuals who haven’t filed and have incomes ranging from $400 to $1 million and above.

FAQs: Substitute for Return

Do you have more questions about an IRS substitute for return that was issued on your behalf? In most cases, it makes the most sense to consult with a tax resolution attorney about your situation. The right attorney will be able to consider your unique circumstances to help you make an informed decision on how to handle your situation. That said, we’ll go over answers to some of the most frequently asked questions about SFRs below.

How Does Filing a Late Return Affect an SFR Filed by the IRS?

You may still have time to file a return even if you have received a notice of SFR. Once you file your late return, the IRS will consider your return over their assessment. In most cases, this is beneficial for the taxpayer since the SFR won’t consider tax credits, deductions, or filing status.

Are There Any Ways to Reduce Penalties and Interest on an SFR?

The IRS does have some options for reducing penalties on an unpaid tax debt. If this is your first issue, you may be able to get a first-time abatement. If you didn’t file due to a death, illness, or natural disaster, you may be able to get penalty abatement for reasonable cause. That said, when you’ve reached the point of having an SFR levied against you, the IRS may be unwilling to approve you for a penalty abatement request. However, you may still be able to get some financial relief if you can genuinely show the IRS that paying off what you owe would cause significant financial hardship. You should consult with a lawyer about these options.

How Can I Prevent the IRS from Filing an SFR in the Future?

The number one way to avoid having an SFR filed on your behalf is to stay ahead of your tax obligations. Get informed about when you need to file a tax return and be sure to do so every year. If you can, you’ll also want to fully pay off your tax obligation when you receive any bill. If that isn’t an option, you should still stay in communication with the IRS. The tax agency is much more willing to work with you when you’re open about wanting to resolve your taxes.

Can an SFR Lead to More Serious Legal Actions from the IRS?

Yes. If you receive an SFR, the IRS automatically assumes the amount of taxes they think you owe to the agency. Once they have given you enough time to contact them, file a return, or dispute the SFR, they have the authority to take more substantial legal action. The IRS has the authority to levy your property or assets. This includes your bank account. The IRS can also garnish your paycheck, which means a portion of your paycheck will go directly to your tax debt.

Are You Ready to Talk to a New York Tax Attorney?

Have you recently received a substitute for return from the IRS? Are you concerned about the IRS’s estimates, or are you simply ready to settle your tax situation once and for all? Here at Timothy S. Hart Law Group, our team of skilled tax professionals is prepared to help you tackle complicated tax matters head on. We can work together to cope with SFRs, audits, liens, levies, wage garnishments, and even criminal charges. We’ll assist you in reviewing your financial situation and determining your ability to pay. We’ll work with you to set up a reasonable payment plan that gets you back on track. Schedule a call with our team now to get started on your tax resolution journey.