An IRS Substitute for Return can be prepared when a taxpayer is required to file a tax return but fails to do so. Instead of allowing an unfiled return to remain unresolved indefinitely, federal tax law gives the IRS authority to prepare a return based on information available to the agency.

That may sound convenient—after all, doesn’t it mean the IRS simply files the return for you?

Unfortunately, it isn’t that simple.

An IRS-prepared return may not include deductions and credits you could potentially claim by filing your own accurate return. More importantly, having the IRS prepare a Substitute for Return does not eliminate your responsibility to address the unfiled return.

Here are seven important things taxpayers should understand.

1. What Is an IRS Substitute for Return?

Under Internal Revenue Code Section 6020(b), the IRS has authority to prepare a return when a taxpayer who is required to file fails to do so.

The IRS describes a Substitute for Return, commonly called an SFR, as a return it may prepare using information it has available about the taxpayer.

The IRS may have access to information reported by third parties, such as wages and other income reported on Forms W-2 and 1099.

The important distinction is that the IRS is creating a tax assessment based on the information available to it—not preparing your return with the same objective you or your tax professional would have when identifying all applicable deductions, credits and other tax positions.

2. An IRS Substitute for Return May Produce a Higher Tax Liability

This is one of the biggest reasons taxpayers shouldn’t simply accept an IRS Substitute for Return without reviewing their circumstances.

Current IRS procedures state that deductions and credits such as the Qualified Business Income deduction and Child Tax Credit generally aren’t allowed on a Substitute for Return prepared under Section 6020(b), although the standard deduction is generally allowed for individual taxpayers. If the taxpayer later files a delinquent return, applicable deductions and credits can then be considered.

The issue can be particularly significant for self-employed taxpayers.

IRS procedures state that the agency has no legal requirement to allow business-expense deductions, including cost of goods sold, when preparing an SFR.

Imagine a self-employed taxpayer whose information returns show substantial gross income but who also incurred legitimate deductible business expenses.

Those expenses can make an enormous difference when determining the taxpayer’s actual taxable income.

This is why an IRS-prepared return shouldn’t automatically be viewed as an accurate substitute for preparing and filing your own return.

3. The IRS Can Send a 90-Day Notice of Deficiency

The IRS Substitute for Return process can eventually result in a proposed tax assessment.

According to current IRS guidance, when the agency prepares a substitute return, it may send the taxpayer Notice CP3219N, also known as a Notice of Deficiency or “90-day letter.”

The taxpayer generally has 90 days from the notice date to file the past-due return or petition the U.S. Tax Court. If neither occurs, the IRS states that it will proceed with its proposed assessment. An extension to file cannot be requested after receiving CP3219N.

This makes opening and responding to IRS correspondence particularly important when unfiled returns are involved.

Taxpayers also have fundamental protections when dealing with the IRS. Understanding your Taxpayer Bill of Rights, including your Taxpayer Right to Appeal, can be especially important when you disagree with an IRS determination.

4. An IRS Substitute for Return Does Not Satisfy Your Filing Responsibility

A particularly important misconception is that once the IRS creates an SFR, the taxpayer no longer needs to file.

That isn’t the case.

IRS penalty procedures specifically provide that a return prepared under Section 6020(b) does not constitute the taxpayer’s return for purposes of determining whether or when the taxpayer filed for the failure-to-file penalty.

In other words:

“The IRS filed something for me” and “I filed my required tax return” are not necessarily the same thing.

The IRS itself advises taxpayers that even after it prepares a substitute return, filing their own past-due return is generally in their best interest so they can claim deductions and credits to which they may be entitled.

5. You May Still Be Able to File Your Own Past-Due Return

This is where the situation can become much more constructive.

The existence of an IRS Substitute for Return does not necessarily prevent you from subsequently filing an accurate delinquent return.

The IRS states that taxpayers should file their own past-due return even after a substitute return has been prepared. The agency will generally adjust the account to reflect the correct figures.

That can provide an opportunity to report the taxpayer’s actual circumstances rather than relying exclusively on the information the IRS used to create its proposed assessment.

However, this does not mean every SFR assessment will automatically disappear or that every late-filed return will reduce the liability. The correct result depends on the taxpayer’s actual income, filing status, deductions, credits and supporting documentation.

6. Unfiled Returns Can Create Long-Term Tax Problems

Waiting out an unfiled return isn’t a sound strategy.

Ordinarily, the IRS generally has a limited period in which to assess additional tax after a taxpayer files a return. But the situation is different when a required return was never voluntarily filed.

The IRS explains that it can assess tax at any time under the Substitute for Return program when a required return hasn’t been voluntarily filed. An IRS-prepared SFR does not start the normal three-year assessment limitation period. If the taxpayer subsequently files a valid return, that filing can start the assessment period.

This is another reason unresolved, unfiled returns shouldn’t simply be forgotten.

Once a tax liability is assessed and remains unpaid, the matter may eventually move into the IRS collection process, potentially creating an entirely different set of issues.

7. Filing the Missing Return May Be Only the First Step

For some taxpayers, filing an accurate delinquent return resolves the central problem.

For others, it reveals the next one:

They owe more than they can afford to pay.

At that point, the question changes from “How do I fix my unfiled return?” to “How do I resolve the resulting tax debt?”

Depending on the taxpayer’s facts and circumstances, IRS resolution alternatives can include installment agreements, Offers in Compromise or Currently Not Collectible status.

The appropriate solution depends on much more than the size of the tax bill. Income, expenses, assets, compliance history and other financial circumstances may all become relevant.

This is where professional tax resolution services can help taxpayers understand what options may be available after their filing obligations have been addressed.

What Should You Do If the IRS Prepared a Substitute for Return?

Start by determining exactly which tax years remain unfiled and whether the IRS has already proposed or assessed a liability for any of them.

Do not assume that an IRS calculation represents what you actually would have owed had an accurate return been filed.

Gather your income records and documentation supporting potential deductions, credits and business expenses. Compare that information with what the IRS used to calculate the proposed liability.

IRS account transcripts can also provide valuable information about what has occurred on a taxpayer’s account, including assessments and other account activity. Our IRS Transcript Monitoring Program content is a natural resource for readers who want to understand why IRS transcript information matters.

Most importantly, pay attention to any deadlines appearing on IRS correspondence—particularly if you have received a Notice of Deficiency.

Can an IRS Substitute for Return Be Corrected?

Potentially, yes.

The IRS expressly states that if it files a substitute return, taxpayers should still file their own return to claim applicable deductions and credits, and the agency will generally adjust the account to reflect the correct figures.

However, taxpayers should avoid thinking of this as simply “amending the IRS’s return.”

At Cheshier Tax Resolution, our objective is to determine the taxpayer’s actual filing requirements and prepare the appropriate delinquent return based on accurate records.

The longer multiple years remain unresolved, the more complicated reconstructing those records can become.

FAQs

What is an IRS Substitute for Return?

An IRS Substitute for Return is a return the IRS may prepare when a taxpayer is required to file but fails to do so. The IRS can use information available to it to determine a proposed tax liability.

Does an IRS Substitute for Return mean the IRS filed my taxes for me?

Not in the same sense as filing your own required return. An SFR prepared under IRC Section 6020(b) does not satisfy the taxpayer’s filing requirement for purposes of the failure-to-file penalty.

Can I file my own return after the IRS files an SFR?

Yes. The IRS specifically advises taxpayers to file their own past-due return even when the agency has already prepared a substitute return. The IRS will generally adjust the account to reflect the correct figures.

Does an IRS Substitute for Return include my deductions?

Not necessarily. IRS procedures state that many deductions and credits generally aren’t allowed when an SFR is prepared, although individual taxpayers generally receive the standard deduction. Business expenses also may not be included.

What is a CP3219N notice?

CP3219N is a Notice of Deficiency the IRS may issue when it proposes tax based on an unfiled return. The IRS says taxpayers generally have 90 days to file the past-due return or petition the U.S. Tax Court after the notice is issued.

What if I cannot afford the tax after filing my missing returns?

Filing compliance and resolving the resulting tax liability are separate issues. Depending on your circumstances, various IRS payment or resolution programs may be available. A tax resolution professional can evaluate the facts and determine which alternatives warrant consideration.

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