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What is a Substitute for Return?

If you are required to file a return and you do not file, the IRS files a tax return for you, known as the Substitute for Return (SFR). In the absence of a tax return, the IRS does not know how much you owe in back taxes. To calculate your tax liability, the IRS gathers information from third party sources such as employers, W-2s, 1099s, banks, etc. This is a rough estimate and does not include every credit and deduction you quality for.

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An SFR only includes one exemption. This may lead to an overstatement of taxes. If you disagree with the SFR, you can file your own tax return and get your tax bill amount corrected if you respond in time.

If you do not respond to the SFR, the IRS will issue a statutory notice of deficiency and begin the collection process. The IRS may place a lien on property and/or assets, or place a levy on wages or bank accounts as part of their collection efforts.

Some other important facts about the SFR are:

  • SFRs includes penalties and interest that are charged on back taxes.
  • It only uses the standard deduction.
  • It only uses the filing status of single or married filing separately.

The filing of an SFR is the first step towards collection. Upon receiving an SFR, you should calculate your tax liability using all credits, deductions, and exemptions, and file your tax return. If you do not file your return, the IRS will treat their estimate as final and begin collection.

Professional representation from an enrolled agent, certified public accountant, or attorney is often needed to file back tax returns and dispute an IRS’ substitute for return. If you cannot pay your tax debt, you may achieve a resolution using an Offer in Compromise, an IRS tax reduction plan, or an Installment Agreement to pay over time. Your tax professional will match you with the suitable resolution plan according to the particulars of your case for an affordable resolution.