IRS File For You? What Is a Substitute for Return (SFR)? 

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. 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? 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. 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.
• 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).

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). As you can imagine, this results in a tax return filing that likely contains incomplete and/or out-of-date information.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. 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. 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.

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. 

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. 

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:

• Filing the missing tax return;
• Explaining to the IRS why you aren’t required to file a tax return; or
• Providing additional information to the IRS explaining why some of the income information they relied on is incorrect.

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.

If you don’t respond to the CP2566 notice, the IRS sends you a CP3219N notice. Sometimes called a 90-day letter, 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. 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. 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. 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. 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.

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. 

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. Or perhaps you concede you were required to file the missing tax return, but had a question about a particular deduction or exemption, 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.