An IRS notice can show a tax balance far higher than you expected, especially when you never filed a return for that year.
In many cases, the reason is an IRS substitute for return, or SFR.
An IRS substitute for return is a return the IRS prepares when you do not file one yourself. The agency uses income information reported by employers, banks, and other third parties to calculate the tax it believes you owe.
Because the IRS does not have the benefit of your actual deductions, dependents, business expenses, or tax credits, the resulting balance may be much higher than the amount shown on a return you would have filed yourself.
The important part is that an SFR does not necessarily end the matter. You may still be able to file your own accurate return and ask the IRS to adjust the account with guidance from an experienced IRS tax problems attorney.
TaxSmith, LLC tax professionals help taxpayers in Northeast Florida address IRS substitute for return assessments, review their transcripts, and determine what needs to be filed. A consultation can help clarify what the IRS has assessed and what options remain.
How to Respond to an IRS CP2000 Notice
Key Takeaways
- An IRS substitute for return is based largely on income information reported to the IRS and may leave out deductions, dependents, and credits you could claim.
- The IRS generally sends a Notice of Deficiency before making the proposed SFR assessment final. This is often called a 90-day letter.
- A Notice of Deficiency gives you 90 days to petition the U.S. Tax Court, or 150 days if the notice is addressed to you outside the United States.
- Filing an accurate return can reduce an SFR assessment when the return establishes a lower correct tax liability.
- Prior-year returns generally must be filed on paper rather than electronically when electronic filing is unavailable for that tax year.
- The IRS collection period is generally tied to the date the tax was assessed, although certain events can suspend or extend the collection period.
What Is an IRS Substitute for Return?
An IRS substitute for return is prepared by the agency when a taxpayer fails to file.
Under Internal Revenue Code Section 6020(b), the IRS can prepare a return based on information available to the agency. That information may include W-2s, 1099s, interest income, and other third-party reporting.
The IRS is not preparing the return with the same information you would have used. It does not automatically know about every deduction, dependent, business expense, or tax credit that may apply to you.
That difference can have a significant effect on the amount the IRS says you owe.
An SFR is therefore best understood as the IRS’s calculation based on the information it has, not necessarily the amount your completed tax return would show.
How Does the IRS Calculate an SFR?
The IRS starts with the income information available in its records for the unfiled tax year.
The process may include:
- Collecting reported income. The IRS reviews W-2s, 1099s, and other information returns associated with your taxpayer identification information.
- Applying a filing status. When the IRS prepares a return without your input, it may use a filing status that produces a higher tax liability than the status you could establish on your own return.
- Leaving out tax benefits. The SFR may not include deductions, dependents, business expenses, or credits that could reduce your actual tax liability.
The result can be a balance that looks very different from what you would have reported if you had filed the return yourself.
That is one reason an IRS substitute for return can be so surprising. The IRS may have enough information to calculate tax, but not enough information to calculate the tax liability you could establish with a complete return.
What IRS Notices Come Before an SFR Assessment?
An SFR usually follows a series of IRS notices rather than appearing without warning.
You may first receive a notice telling you that the IRS has no record of your tax return. The notice may give you an opportunity to file the missing return or contact the IRS.
If the IRS continues with the proposed assessment, it may send a notice explaining the income it has identified and the tax it proposes to assess.
The most important notice is the Notice of Deficiency, commonly known as a 90-day letter. This notice gives you 90 days to file a petition with the U.S. Tax Court. If the notice is addressed to a person outside the United States, the period is generally 150 days.
Missing that deadline can remove your opportunity to challenge the proposed deficiency in Tax Court before the assessment is made.
Once the tax is assessed, the IRS can begin collection activity if the balance remains unpaid. Depending on the circumstances, that can include federal tax liens and levies against assets or income.
If you receive a Notice of Deficiency, the deadline on that notice deserves immediate attention. This guide explains how to respond to an IRS Notice of Deficiency.
How to Correct an IRS Substitute for Return
Correcting an SFR starts with finding out exactly what the IRS used to calculate the assessment.
1. Get Your IRS Transcripts
Request your wage and income transcript to see the income information reported to the IRS for the year in question.
Your account transcript can also show important information about the assessment, payments, penalties, and other activity on the account.
These records can help determine whether the IRS has actually assessed an SFR and how it calculated the balance.
2. Prepare the Correct Tax Return
The next step is to prepare the return that should have been filed for that tax year. A knowledgeable Jacksonville unfiled tax returns attorney can help review the missing filing and the records needed to complete it accurately.
That may include information the IRS did not have when it prepared the SFR, such as:
- Additional deductible expenses
- Business expenses
- Dependents
- Filing-status information
- Tax credits
- Other income or adjustments that affect the calculation
The goal is to give the IRS the complete return and supporting information it did not have when the SFR was prepared.
3. File the Return With the IRS
Older unfiled returns may need to be mailed because electronic filing is not available for every prior tax year.
Follow the filing instructions provided by the IRS and the instructions on any notice you received. Keep a complete copy of the return and proof that you sent it.
If the IRS has already assessed an SFR, identifying the assessment and explaining that you are submitting the actual return can help the agency connect the filing with the existing account.
4. Monitor the IRS Account
Filing the return does not mean the account will immediately show the corrected balance.
The IRS must process the return and update its records. If the account involves significant IRS penalties, collection activity, or multiple unfiled years, additional steps may be necessary.
A tax professional can review the account transcript after filing to confirm whether the assessment was adjusted and whether additional issues remain.
What Happens After You File the Correct Return?
The IRS can use your filed return to reconsider the amount assessed through the SFR.
If your accurate return establishes a lower tax liability, the IRS may adjust the account and reduce the amount you owe. That adjustment can make a substantial difference when the original SFR left out deductions, credits, dependents, or other information.
Processing is not immediate, however. Until the IRS processes the return and updates the account, the original assessment may continue to appear in IRS records.
The collection timeline also deserves attention. Understanding the IRS collections process timeline can help clarify what may happen while the account is being corrected.
Under Internal Revenue Code Section 6502, the IRS generally has 10 years from the date of assessment to collect an assessed tax liability.
That does not mean every IRS debt expires exactly 10 years after the date shown on the original notice.
Certain events can suspend or extend the collection period, including some bankruptcy proceedings, collection due process activity, and periods when the taxpayer is outside the United States.
A corrected return does not automatically create a new 10-year collection period for the original SFR assessment. If the corrected return results in an additional tax liability above the original assessment, however, the additional amount can have its own assessment and collection timeline.
Your IRS account transcript is the best place to start when determining the relevant dates.
FAQs About IRS Substitute for Return Assessments
How do I know if the IRS already filed a substitute for return?
Your IRS account transcript can provide important clues about whether the IRS has made an SFR assessment.
You can request IRS transcripts through your online IRS account or through the IRS transcript process. The wage and income transcript can also show the information the IRS received from third parties for the year.
If the transaction codes or assessment information are difficult to interpret, a tax professional can review the transcript with you.
What happens if I ignore an IRS substitute for return notice?
Ignoring the notices can allow the IRS to move forward with the proposed assessment.
If you receive a Notice of Deficiency, pay close attention to the deadline stated in the notice. Missing the 90-day period, or the 150-day period for a notice addressed outside the United States, can affect your ability to challenge the proposed deficiency in Tax Court.
Once the tax is assessed, the IRS can pursue collection of the unpaid balance. Depending on the circumstances, collection measures may include a federal tax lien or levy.
Can filing my real tax return lower what I owe?
It can.
Your actual return may include deductions, credits, dependents, business expenses, or other information that was not reflected in the SFR. If the completed return establishes a lower correct tax liability, the IRS may adjust the assessment.
The IRS must still process the return before the account reflects the corrected amount.
Can I still file a return after the IRS prepares an SFR?
In many cases, yes.
An SFR does not necessarily prevent you from submitting the return that should have been filed. The filing process can become more complicated if the IRS has already assessed the tax, collection activity has begun, or multiple years remain unfiled.
Reviewing the IRS transcripts before filing can help identify what has already happened on the account.
TaxSmith, LLC Can Help Correct an IRS Substitute for Return
Seeing an IRS balance based on a return you never filed can make it seem as though the IRS has already made the final decision for you.
An SFR, however, may not reflect the tax liability shown by a complete and accurate return.
The first step is to find out what the IRS used to calculate the assessment. From there, the right return, supporting records, filing method, and collection strategy depend on the facts of the account.
TaxSmith, LLC helps taxpayers in Jacksonville Beach and throughout Northeast Florida review IRS assessments and address unfiled returns. If you received an SFR notice or a Notice of Deficiency, contact our firm today to discuss your IRS account and the steps available to correct it.
