What is a Substitute Return and Why is it Bad?

June 15, 2021

If you haven’t filed your back taxes, the IRS can file a substitute return or SFR on your behalf. For many people, this comes in the form of an unpleasant surprise because a tax return substitute doesn’t take deductions into account. With 900,000 Americans neglecting to file their taxes every year, the IRS has a big backlog of unfiled taxes; but that doesn’t mean that you won’t be targeted.

What Is a Substitute Return?

SFRs are prepared by the IRS without any deductions or exemptions that you might be entitled to. The IRS generally files SFRs two years after you were supposed to file your return, and these filings are automated and include any applicable penalties. SFRs are especially dangerous to freelancers and self-employed people, who usually need a lot of deductions to avoid paying huge tax bills.

Fortunately, you can appeal the SFR process, but you need to act quickly, and ignoring the problem can land you in a lot of hot water. Depending on how much you owe, the IRS might be able to tack on additional fees or even prosecute you criminally. In addition, unlike regular tax debt, SFRs have longer statutes of limitations, and you are less likely to be able to claim bankruptcy.

If you get a surprise SFR, there’s help available. Understanding your options is the first key to getting out of trouble and back in good standing with the IRS.

What Happens When the IRS Files a Tax Return Substitute?

The IRS will notify you that they’ve begun filing your SFR by letter. You’ll be told that your tax return for the year in question is missing and that the IRS has filed one on your behalf. When this happens, it’s important not to panic. You can still fix the situation if you move fast. The letter will also detail the tax liability that you owe, which you can contest when you file your return.

The letter will let you know that you have thirty days to act. You will need to send them a 1040 for the year in question, as well as a Consent to Assessment and Collection form. Alternately, you can send them a letter with all of the reasons why you didn’t have to file for that year. These vary from state to state and are fully up to the IRS’s discretion, so it’s best to hire professional counsel if you want to go that way.

Notice of Deficiency

After a month, the IRS needs to send you another document known as a Statute Notice of Deficiency, or SND. This letter tells you that the IRS is going to go ahead with your SFR and lets you know that you can take the case to U.S. Tax Court if you wish. It’s very important that you don’t ignore either of these letters because, after 90 days, the IRS can start calculating back taxes and assess additional penalties. After they’ve filed everything, it’s very hard to appeal.

IRS Calculations

The IRS doesn’t make calculations as you would. They simply use all of the information that you’ve gotten from your 1099s and W-2s and process your return. They can also use information from third-party places to put together a larger picture. Unfortunately, the IRS doesn’t look for deductions, which means that their return will be much higher than anything you would file.

You might be stunned at the amount of money the IRS says that you owe. Remember, this is just the beginning, and you might not be liable for it all if you immediately address the problem. It’s wise to contact tax resolution professionals before the situation worsens and the IRS starts adding on additional penalties or fees. Ignoring the tax return substitute from the IRS is simply not a good option.

What You Can Do 

While it’s better to act as quickly as possible to avoid having an SFR filed against you and file your taxes on time, to begin with, there are a few things that you can do. You can ask the IRS for an audit reconsideration process and attempt to file the delinquent return. Be advised; returns filed very late can be subject to intense scrutiny by the IRS, especially if your return contradicts theirs.

It’s a good idea to talk to a professional team who understands tax law and working with the IRS. SFRs can cost you a lot of money and resources. Depending on the amount that you owe and your assets, it could also put you at risk for liens, garnishments, or even jail time. Talking to a professional could make you feel better and also give you a good overview of your options. If you’re unclear, it’s best not to go it alone.

Staying Current With the IRS

Ultimately, you can avoid these types of situations by simply staying current with the IRS. Even if you don’t want to file your taxes, it’s easier just to get it done and pay whatever you can at the moment if you know that you have delinquent returns but haven’t gotten an SFR from the IRS yet, considering filing them all. It will give you a tremendous amount of peace of mind.

Professional tax resolution experts can help you file your back taxes and set up payment plans for any money you owe. Good companies that know the IRS inside and out will be able to set up reasonable payment plans that will keep you current and out of IRS collections. Moving forward, make a plan to file your taxes on time every year. That way, you can stay one step ahead of the game with the IRS.

Working With Tax Experts Can Save You Headaches

A lot of people feel overwhelmed and scared when they’re served with an SFR. It’s helpful to remember that many people are in the same boat and that there are resources for you if you know how to use them quickly. Work with a company that has plenty of experience with the IRS and can offer you a comprehensive consultation of all of your options. These sorts of gold standard companies will not judge you. Instead, they will tailor solutions to fit your specific circumstances.

Good tax resolution companies know that there’s always a way to get current with the IRS again and will work with you on a personalized plan that helps seizures, garnishments, and levies stop right away. They will also run interference between you and the IRS to work out a plan. The entire goal should be to establish an arrangement that benefits you and comfortably fits into your lifestyle. With expert negotiation and experience, these sorts of allies can help you to breathe easier knowing that your situation will be resolved.

If the IRS is threatening you with a substitute return for unpaid taxes, we can help. At Geaux Tax Resolution, we have 35 years of experience dealing with the IRS and a comprehensive understanding of how the IRS operates. If you get in over your head with the IRS, remember that it’s best not to ignore it or go it alone. Contact Geaux Tax Resolution at 337-420-1040 today for a consultation of your tax relief options.