What is a Substitute Filed Return by the IRS?

It is not as uncommon as one may think for individuals or businesses to fall behind in having their tax returns prepared and filed with the IRS.  While not uncommon, not filing income tax returns can be problematic for many reasons especially if the IRS files a substitute tax return for you and begins collecting on any tax liability.  This article has been prepared by a Columbus-based tax attorney to provide additional information regarding substitute filed tax returns and related issues. if you have further questions or require assistance, contact The McGuire Law Firm for a free consultation.

What is a Substitute Filed Tax Return?

A substitute tax return, sometimes referred to as an “SFR” is when the IRS files a return for a taxpayer based upon all of the information the IRS has because the taxpayer has not filed a return.

What Allows the IRS to File a Substitute Return for a Taxpayer?

Internal Revenue Code 6020(b) allows the IRS to prepare, file a tax return and have tax assessed to an individual or business when the applicable taxpayer has failed to file their return.  Thus, the IRS’ ability to file an SFR and codified and statutory.

What Figures and Information Does the IRS Use to File a Substitute Return?

The IRS will use income reported by third parties such as 1099s and W-2s to prepare and file a substitute return.  These informational returns are maintained by the IRS in what is called a “wage and income” transcript.  When a return is not filed and it appears an individual (or perhaps business) may owe tax, and the return is not filed, usually after the IRS has provided notice to the taxpayer to file the return, the IRS will file the substitute return.  

Will The IRS Afford Me the Benefits of Tax Deductions and Other Items?

No, generally not.  The IRS is not going to make assumptions as to your business expenses or other items that may reduce your total tax.  For example, if you had $100,000 of income reported on a 1099 NEC to you as an individual, the IRS is going to tax all $100,000 without giving you the benefit of your business expenses.  Thus, the amount of tax assessed via a substitute return could be significantly more than if you filed an accurate return.

Can The IRS Collect Tax Due Assessed From a Substitute Return?

Yes, the IRS can move forward with collection action such as levies and seizures on a tax balance that has been assessed from a substitute tax return.  Generally, the normal collection process is followed with notices and eventually final notice being issued to the taxpayer and if the tax debt is not paid, the IRS can levy bank accounts, garnish wages and seize other assets.  

Can I File an Actual Tax Return Once the IRS Has Filed a Substitute Return?

Yes, you have the right to file your own return when the IRS has filed a substitute return.  The return may need to be filed and processed through a different unit or department than you would normally file your return.  Further, the processing of the return you file may take significantly longer once the IRS has filed a substitute return.  

What Other Problems Can a Substitute Return Cause?

The IRS could file a notice of federal tax lien on a substitute return balance that is incorrect.  This tax lien could create problems with a taxpayer receiving loans or lines of credit, or if you were to sell an asset, the lien would attach to the asset and you may not be able to properly transfer title to an asset without paying off the tax debt from the substitute return, which could be incorrect.  The IRS could also actively collect on the substitute return balance and be looking to collect an amount of tax that is drastically incorrect.  If monies were paid to the incorrect tax liability whether voluntarily or through seizure or levy, you would only have a certain amount of time to file an accurate return and request a refund.  Thus, you could potentially overpay your tax bill because the IRS has filed and/or collected on an incorrect balance from the substitute return.  Additionally, the failure to file returns with the IRS could lead to criminal prosecution.

Speak with a Columbus Tax Attorney

If you have received notices from the IRS requesting you file a return and would like to discuss your tax issues with a tax attorney, you can contact The McGuire Law Firm for a free consultation.