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If you’re like many taxpayers, the worst part of the IRS isn’t necessarily paying taxes. Instead, it’s preparing your individual income tax return each year to send to the IRS by the April 15 deadline. Failing to do so could get you into trouble for not filing your tax return. The IRS imposes a failure to file penalty if you do not submit your return on time, and this file penalty can add up quickly.

But getting all your financial documents together and filling out a complicated IRS Form 1040, U.S. Individual Income Tax Return (or hiring someone else to do it for you), can be confusing and stressful.

What if you learned that the IRS will sometimes prepare tax returns for individual taxpayers? The IRS’s authority to prepare such return is established for legal purposes, and these returns are considered prima facie good for assessment and collection. When the IRS prepares and files a tax return for you, it’s called a substitute for return, but the IRS isn’t doing this to be nice or help you out. The IRS’s substitute for return is not always in the taxpayer’s favor and is used for legal purposes to enforce compliance. Let’s take a closer look at what a substitute for return is and why you should avoid having the IRS file one for you.

Key Takeaways

  • Substitute for return – a tax return that the IRS files on behalf of a taxpayer who the IRS believes should have filed one, but hasn’t.

  • Process – The IRS relies on information from third parties (such as W-2s and 1099s) to prepare the substitute for return (SFR), but doesn’t apply any credits, deductions, or exemptions. As a result, the assessed tax is often greater than the taxpayer’s actual tax liability. Filing your own return ensures the correct tax liability is determined, preventing overpayment or underpayment.

  • How to respond – The best way for taxpayers to respond to the SFR is to pay the assessed tax, explain that a return wasn’t required, or file the missing tax return.

  • Consequences of not responding – Ignoring the SFR could result in collection actions by the IRS, such as a tax lien or property seizure (including wage garnishment).

Introduction to IRS Substitute for Return

The Internal Revenue Service (IRS) has the power to step in when a taxpayer fails to file a required tax return or submits a false or fraudulent return. In these situations, the IRS prepares what’s known as a substitute for return (SFR). This substitute is not meant to benefit the taxpayer—instead, it’s a tool the IRS uses to enforce tax compliance and ensure that all income is reported and taxed according to internal revenue law.

When the IRS prepares a substitute for return, it relies heavily on third party information, such as W-2s from employers and 1099s from banks or other payers. Because the IRS does not have access to your full financial situation, the substitute for return SFR typically does not include deductions, credits, or exemptions you might be eligible for. This means the tax liability calculated by the IRS is often higher than if you had filed your own return.

If you receive notice that the IRS has filed a substitute for return on your behalf, it’s important to understand that this is a serious matter. The IRS is acting under its authority to ensure all taxpayers meet their filing obligations, and the SFR process can result in a larger tax bill, additional penalties, and interest. Consulting a tax professional can help you understand your rights, correct your tax liability, and take the necessary steps to resolve the situation before it escalates.

IRS Authority and Filing Requirement

The authority for the IRS to file a substitute for return comes from Section 6020(b) of the Internal Revenue Code. This section gives the IRS the legal right to prepare and file a substitute return when a person fails to file a required tax return or submits a false or fraudulent return. The IRS must follow specific procedures, including signing the substitute return and using available information to accurately compute the taxpayer’s tax liability.

If you do not file your own tax return, or if you file a fraudulent return, you may be subject to significant consequences. The IRS can assess penalties and interest on top of your tax debt, and the substitute return process can result in a higher tax bill because it does not account for deductions or credits you may be entitled to claim. This makes it crucial for taxpayers to understand their filing requirements and to take action if they are unsure about their obligations.

The IRS website offers resources to help taxpayers determine if they are required to file, and reaching out to a tax professional can provide personalized guidance for your specific tax situation. By filing your own tax return, you ensure that you are taking advantage of all available deductions and credits, minimizing your tax liability, and avoiding the negative consequences that come with an IRS-filed substitute return. Taking proactive steps to meet your filing requirements is the best way to protect yourself from unnecessary penalties, interest, and increased tax debt.

Understanding the Substitute for Return 

A substitute for return (SFR) is a tax return that the IRS files for you. They do this using internal information they already have on you, plus information they obtain from third parties, like employers, banks, and third-party payment processors (through the use of W-2s and 1099s). The IRS uses income reported on forms such as W-2s and 1099s, which typically reflect wages and other taxable income. As you can imagine, this results in a tax return filing that likely contains incomplete and/or out-of-date information. Generally, the IRS only issues a substitute for return if you haven’t filed for several years, but it can happen even if you’re just missing a single year.

For example, if you got married, divorced, or had a child during the tax year subject to the SFR, the IRS can’t adjust your SFR to reflect this change. The IRS may assume a filing status of single or married filing separately, which can affect the calculation of your tax liability. This means the IRS will ignore any applicable tax deductions, credits, or exemptions that could lower your tax bill.

At first glance, it might seem like the IRS is doing you a favor by filing a return for you, but they’re actually trying to get more money from you. The IRS’s SFR is a substitute tax return and is not the same as a return you file yourself. As if that’s not bad enough, because the IRS believes you never filed a required tax return, you’ll also be hit with interest and penalties. The IRS may rely on its own knowledge and such information as it can obtain to prepare the SFR.

This sounds a bit unnerving and might motivate you to never miss another tax filing deadline. While this is a good thing, understand that the IRS doesn’t prepare and file an SFR the day after your tax return is due. Only after the original and extended due dates have passed, and the IRS’ efforts to contact you about the unfiled tax return have failed, will the IRS prepare and file an SFR. In practice, this usually means the IRS will mail you several notices about the missing tax return before filing an SFR.

Sometimes, the IRS may prepare a dummy return, which is a minimal placeholder and does not qualify as an official return for assessment purposes.

How the IRS Prepares an SFR 

Before preparing an SFR, the IRS sends you a series of notices, including CP59, CP515, CP516, and CP518. These are letters that essentially state that the IRS didn’t get a tax return from you and that if the IRS doesn’t hear from you, the IRS will take additional action, including filing an SFR.

If after receiving CP518 (the final notice), you don’t file the missing tax return or contact the IRS to explain why you believe you shouldn’t have to file one, the IRS will prepare the SFR. The IRS uses its Automated Substitute for Return (ASFR) computer system to prepare the return, although humans will sometimes double-check an SFR or manually prepare an SFR. When the IRS calculates the tax owed through the ASFR system, it uses only the data it has, which may result in a higher balance than if you filed yourself.

When the IRS files a substitute return, it calculates your tax based on the information available, which may not reflect your actual situation.

How to Respond to a Substitute for Return 

After the IRS finishes preparing the SFR, they will mail you IRS Notice CP2566. This notice informs you that the IRS prepared an SFR and that it used third-party information to calculate your taxes, plus penalties and interest. CP2566 also explains that you have 30 days to respond by:

Alternatively, you can pay the tax assessment by mailing in your payment along with the Consent to Assessment and Collection. If you choose to do this, just remember that the tax assessment amount is likely to be more than what you owe. Failing to file your own return after an SFR may also result in losing out on refunds you are otherwise entitled to, since the IRS-calculated SFR does not account for credits or deductions you may qualify for.

If you don’t respond to the CP2566 notice, the IRS sends you a CP3219N notice. This is also known as a notice of deficiency, sometimes called a 90-day letter, and it gives you 90 days to either file the missing tax return or file a petition to the U.S. Tax Court to challenge the proposed tax balance. The IRS may also send other notices such as a CP503 notice, which alerts you to ongoing tax delinquency and the potential for further penalties. If you don’t choose either option, the IRS assumes you agree with the proposed tax assessment and begins the unpaid tax collection process.

Why Responding to the SFR Is Important 

If you owe taxes to the IRS, the faster you respond to the IRS, the more quickly you can prevent collection actions, like tax liens and levies. Unpaid taxes can trigger aggressive collection actions by the IRS, including the filing of a substitute for return (SFR) and other enforcement measures. Contacting the IRS also gives you a chance to make arrangements to pay your tax bill over time with a payment plan or installment agreement.

Suffering from a financial hardship where you truly can’t afford to pay your taxes means there may be other options available, like Currently Not Collectible (CNC) Status or an Offer in Compromise. There’s also the fact that if you’re eligible for a tax refund or credit, you need to request it within two years from the date you paid the tax or three years from the date the tax return was filed, whichever is later. If you don’t respond properly to the SFR by filing a return, you could miss out on this tax benefit.

Another problem with not filing a missing return is that it doesn’t start the “clock” for the three-year statute of limitations for tax assessment. Officially called the Assessment Statute Expiration Date (ASED), this gives the IRS three years from the date the IRS receives an original tax return or three years from the original tax return’s due date, whichever is later, to assess a tax.

If you filed a tax return on April 15, 2025, for the 2024 tax year, the IRS has until April 15, 2028, to assess a tax against you concerning your 2024 individual income taxes. If they complete an assessment after that date, the law prevents the IRS from trying to collect that 2024 tax from you. But if you never file a tax return for 2024 and the IRS files an SFR for you, the three-year ASED clock never starts ticking. The statute of limitations does not begin until the return required is filed, so the IRS can assess tax at any time until you file the necessary return. Put another way, the IRS has as long as it wants to assess a tax against you as long as you never file a return for that tax year.

Preventing a Substitute for Return from the IRS 

The simplest way to avoid an SFR is to file your tax returns on time. It is crucial to file tax returns each year to ensure proper processing and to avoid the IRS preparing substitutes on your behalf, which may not accurately reflect your tax situation. Barring that, you can prevent an SFR by making other arrangements with the IRS. For example, if you don’t think you’ll file by the traditional April 15 deadline, you can fill out IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. In most cases, the IRS can only grant extensions of up to six months.

Keep in mind that even if the IRS grants this extension, it only applies to the requirement to file your tax return, not pay your taxes. Therefore, if you end up owing taxes, you could still have to pay penalties and interest even though you file your return by the extended deadline.

To avoid situations where you know you need to file a return, but you don’t feel like you have the information you need, it helps to stay organized with your financial documents and records. When you get your 1099s and W-2s from your employer, bank, and other third parties, find a safe place to store them. If you run a business, it might be worth hiring an employee or outside company to help you manage payroll, accounts receivable, and other accounting-related tasks. Self employed individuals should be especially diligent in managing their tax obligations and filing all required returns to avoid IRS substitutes, which can result in higher tax assessments and penalties.

The last and most important way to avoid a substitute for return is to respond to the notices from the IRS. As soon as you receive the CP59 notice, prepare and file the missing tax return or explain to the IRS why you believe you aren’t required to file a tax return. Responding quickly won’t always negate a penalty or interest, but can potentially reduce them. At the very least, you can avoid the stress and hassle of an SFR and getting a CP2566 notice. If you are unsure about your filing requirements or need help avoiding an SFR, consider consulting tax professionals to ensure compliance and avoid unnecessary penalties.

Need Help Responding to a Substitute for Return? 

Figuring out the best approach to take when responding to the IRS isn’t always easy or clear. For instance, you might believe you weren’t required to file a tax return for the year in question, but don’t know what statutes, rules, or regulations support your position. Understanding the rules for filing a tax return is crucial to avoid IRS action, such as the IRS preparing a Substitute for Return (SFR) if you fail to file. Or perhaps you concede you were required to file the missing tax return, but had a question about a particular deduction, exemption, or tax credits, so you never got around to filing the return.

In these and other similar situations, Damiens Law is here to assist. To learn about how we can help you with unfiled returns and responding to an SFR, contact us to set up a free consultation.