Substitute Return

Did You Know the IRS Can File a Substitute Return on Your Behalf?

If you fail to file your tax returns for one or more years, you might get an unpleasant surprise and find that the IRS has filed a substitute tax return on your behalf. When the IRS or State of Maryland decides to do this, they simply base the substitute return on whatever information they have at their disposal.

Unfortunately, when a taxation entity, the IRS, or State of Maryland files your return for you, they won’t bother to look for the best deductions and write-offs. And in some cases, their computer programs might even overstate your tax liability.

Of course, the best way to avoid this is to file an original return on time every year, but if you haven’t been able to file in the past and you’re still behind from those years, here’s more information on how a substitute return works.

The Substitute for Return Process

When the IRS begins the substitute return process, they’ll send a letter informing you they have not received a return for the applicable year(s) and proposing a tax liability assessment (plus additional penalties and interest) based on your income from those years. This letter also notifies you that you have 30 days to submit a completed 1040, a signed Consent to Assessment and Collection form, or a return letter that provides the reasons you’re not required to file or any other special circumstances you feel the IRS needs to consider.

If you don’t respond within 30 days, the IRS is required by law to send a statute notice of deficiency (SND), which is also known as a 90-day letter. This letter notifies you that the IRS is going to assess the tax owed along with any penalties and interest, and it also informs you of your right to appeal to the U.S. Tax Court.

RELATED: Handling a Notice from the IRS the Right Way

Once you receive this letter, you have 90 days from the date of the letter (U.S. Tax Court might use the postmark date) to dispute the amount proposed. If you don’t respond to the SND, the IRS can assess taxes and begin collection efforts, including liens, levies, and garnishments.

So how does the IRS get the information they use to prepare your substitute returns? The Substitute for Return (SFR) program gathers information from W-2s and 1099s, as well as third-party sources, and then creates the return based on that information. Once the IRS computer has filed a substitute return, the IRS will inform you by mail and ask for your consent to the proposed return. The substitute return only allows for the standard deduction, one exemption, and a single or married filing single status.

Because the substitute for return process is automated, there’s an inherent risk of errors — many of which could prove costly for you, the taxpayer. There is no human oversight to ensure the assessment is reasonable, and income sometimes gets reported erroneously. For example, occasionally there are duplicate incomes registered in the system.

Steps to Take When the IRS Has Filed a Substitute Return

Thankfully, even after the IRS has filed a substitute return and assessed taxes, you can contest the amount through the audit reconsideration process. This process essentially involves filing the original delinquent return that triggered the SFR procedure. If your attempt to contest doesn’t succeed, you’ll need to pay the amount due and file a claim for a refund. If the IRS denies your claim, you can still file an appeal.

Other viable options include filing an Offer in Compromise or Doubt as to Liability to mitigate or even eliminate your tax liability.

Don’t Delay! File Your Late Taxes With S.H. Block Tax Services Today to Avoid Fees and Penalties

You should always try to file your tax returns on time, but if you have failed to do so in the past, you should still consider filing a delinquent return to take advantage of your deductions and exemptions. In some cases, you might even be eligible for a refund, but you must act fast, as the time limit to claim the refund is three years from the original filing deadline. Even if you won’t receive a refund, it takes weeks or even months for the IRS to process your original returns, and they will typically suspend collection efforts while they see to your account.

Regardless of your situation, S.H. Block Tax Services can help file your returns and navigate the SFR process. Our staff has decades of experience, and we have earned an A+ rating with the Better Business Bureau. Please contact us today by calling (410) 872-8376 or completing this brief form. We offer free consultations during which we can assess your tax situation and work toward potential solutions.

Remember, the statute of limitations for collecting tax refunds is only three years from the original filing deadline, so please reach out today!

The content provided here is for informational purposes only and should not be construed as legal advice on any subject. Please read our full disclaimer here.

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