What an IRS Substitute for Return Really Is

Filing season may be over, but the IRS process is not finished.

For taxpayers who did not file, the IRS may still have enough information to start building a tax account. Employers, banks, brokers, retirement plans and other reporting sources send income documents to the IRS. Those records can move through IRS matching systems even when the taxpayer never files a return.

That is where a Substitute for Return becomes important.

A Substitute for Return is not the IRS doing the taxpayer a favor.

It is the IRS using available information to propose and assess tax when a taxpayer has not filed a required return.

Now that filing season has passed, the next set of decisions begins. Before IRS processing or planning opportunities are missed, speak with Steve Perry, EA about your situation. Call 678-717-9818, email [email protected], or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.

A Substitute for Return Is an IRS Prepared Account

A Substitute for Return is often called an SFR.

It is created when the IRS believes a taxpayer was required to file but did not.

The IRS does not prepare that account the way a tax professional prepares a complete return. The IRS uses information available to it. That may include:

• Wages
• Interest income
• Dividend income
• Retirement distributions
• Brokerage sales
• Contractor income
• Payment processor records
• Other third party reporting documents

The IRS may not have the taxpayer’s full picture.

That is the problem.

What the IRS May Miss

A taxpayer prepared return should include the facts needed to calculate the correct tax.

A Substitute for Return may not.

The IRS may not know about:

• Business expenses
• Basis in investments sold
• Correct filing status
• Dependents
• Credits
• Itemized deductions
• Self employment adjustments
• Rental property expenses
• Retirement basis
• Net operating loss issues
• Other facts that reduce the correct tax

The result can be a proposed balance that is higher than the tax that would have been shown on a properly filed return.

That does not mean the IRS is guessing.

It means the IRS is working from limited information.

Why an SFR Happens After Taxpayers Stay Silent

A Substitute for Return is usually not the first IRS step.

The IRS system has already received income information. It has not received the taxpayer’s return. That gap creates a nonfiler issue.

The IRS may send notices asking for the missing return.

If the taxpayer does not respond, the account can move toward an SFR assessment.

At that point, the IRS is no longer waiting for the taxpayer to explain the year. It is building the account from the records it has.

This is why silence creates risk.

The taxpayer may feel that nothing is happening.

The IRS system may still be moving.

The Notice Before Assessment Matters

Before the IRS assesses tax based on a Substitute for Return, the taxpayer may receive a statutory notice of deficiency.

That notice is serious.

It gives the taxpayer a limited window to respond, file the correct return. If the taxpayer does nothing, the IRS can move forward with the proposed assessment.

This is one of the most important moments in the process.

Ignoring that notice can allow the IRS version of the account to become assessed tax.

If you are unsure what happens next after filing or whether your return could trigger IRS correspondence, speak with Steve Perry, EA to review your position. Call 678-717-9818, email [email protected], or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.

An SFR Can Start Collection Activity

Once the IRS assesses the tax, the account can move into billing and collection.

That may lead to:

• Balance due notices
• Penalties and interest
• Collection notices
• Federal tax lien risk
• Levy risk
• Enforcement sequencing if the taxpayer does not respond

The taxpayer may believe the issue is still about a missing return.

The IRS account may have moved beyond that.

Now the issue may involve both filing compliance and collection resolution.

That is why timing matters.

Filing the Correct Return Can Still Matter

Receiving an SFR does not always mean the taxpayer is stuck with the IRS calculation.

A taxpayer may still file the correct original return for that year.

The correct return will generally show a lower balance if it includes deductions, credits, basis, dependents, filing status, expenses, or other facts the IRS did not have.

This is not the same as casually changing numbers.

The return must be accurate.

It must be supported.

It must be prepared as a complete taxpayer return, not as a guess in response to a notice.

The IRS Version May Not Be the Best Version

The IRS is not preparing the return to maximize the taxpayer’s legal deductions.

The IRS is creating an assessment from available information.

That distinction matters.

For example, a taxpayer with contractor income may have business expenses. A taxpayer with stock sales may have basis. A taxpayer with dependents may qualify for credits. A taxpayer with mortgage interest, charitable contributions, medical expenses, or state taxes may have itemized deductions.

The SFR may not reflect them. The IRS doesn’t collect that information and even for the expenses that are reported such as stock sale basis or mortgage interest, the unit computing the SFR doesn’t care.

That can make the balance look worse than the taxpayer expected.

Before assuming your tax situation is complete for the year, consider having Steve Perry, EA evaluate your next steps and planning opportunities. Call 678-717-9818, email [email protected], or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.

Why Post Filing Season Is the Time to Act

After filing season, taxpayers often think the year is over.

For nonfilers, this is when exposure may be developing.

The IRS may be processing information returns. Matching systems may be identifying missing returns. Notices may be generated. Prior year nonfiling may become visible. Collection sequencing may begin after assessment.

Waiting until next filing season does not improve the account.

It may allow the IRS process to continue without the taxpayer’s return.

Post filing season is the right time to ask:

• Are all required returns filed?
• Has the IRS already issued a nonfiler notice?
• Has a proposed assessment been issued?
• Is there an SFR on the account?
• Would a correct return reduce the balance?
• Are current year payments being handled properly?
• Is a collection alternative needed after filing?

These questions are easier to answer before enforcement pressure increases.

Common Mistakes With Substitute for Return Cases

Taxpayers often make the same mistakes.

They include:

• Ignoring IRS nonfiler notices
• Assuming the IRS prepared a complete return
• Waiting until collection begins
• Failing to file the correct original return
• Responding without checking IRS transcripts
• Forgetting business expenses or basis
• Missing the notice of deficiency window
• Creating a new balance while trying to fix an old year
• Treating the IRS assessment as final without review

These mistakes can be corrected in many cases.

But delay reduces control.

The Better Approach

The better approach is orderly.

First, determine which returns are missing.

Second, review IRS transcripts and income records.

Third, prepare the correct return.

Fourth, compare the correct return to the IRS proposed or assessed amount.

Fifth, address penalties, interest and collection options.

Sixth, correct current year compliance so the same problem does not repeat.

That is how the issue moves from IRS control back toward taxpayer participation.

Final Thought

A Substitute for Return is not a complete taxpayer return.

It is the IRS using available information to create an assessment when a taxpayer does not file. It may miss deductions, credits, basis, expenses and other facts that affect the correct tax. Once assessed, it can lead to billing, penalties, interest and collection activity.

Filing season may be over, but IRS processing, matching, billing and enforcement sequencing continue after submission. Many IRS problems arise not from one missed filing decision alone, but from what taxpayers fail to do after the IRS starts acting on that missing return.

After filing season ends, many taxpayers miss critical planning windows that affect next year’s outcome. If you want to stay ahead of the process, speak with Steve Perry, EA now. Call 678-717-9818, email [email protected], or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.

FAQ

What is a Substitute for Return?

A Substitute for Return is an IRS prepared account based on information available to the IRS when a taxpayer does not file a required return.

Is a Substitute for Return the same as my own tax return?

No. It is not a complete taxpayer prepared return. It may not include deductions, credits, expenses, basis, dependents, or other facts that reduce the correct tax.

Can I still file my own return after an SFR?

In many cases, yes. A taxpayer may be able to file the correct original return to replace or correct the IRS calculation.

Why is an SFR balance often higher?

The IRS may only have income records. It may not have the taxpayer’s expenses, basis, deductions, credits, or filing details.

What should I do if I receive an IRS SFR notice?

Do not ignore it. Review the notice, gather records, check transcripts and determine, with the help of a competent professional, such as Steve Perry, EA, whether a correct return should be filed before the IRS assessment or collection process advances.