The IRS SFR (Substitute For Return) Explained by a CPATax Relief
Failing to file taxes for more than a year initiates a long and often stressful process. The IRS will file SFR for taxpayers using the information they can acquire from employers and banks.
In other words, you’re likely to pay more taxes if the IRS files a tax return for you than you’d pay if you’d file it on your own. This doesn’t happen instantaneously, and you’ll receive correspondence from the IRS informing you of your outstanding debt.
In most cases, you’ll have to file the original tax return to replace the SFR and settle the taxes you owe to the government. Let’s take a closer look at the IRS SFR and what you can do to go through this process smoothly.
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What is The IRS Substitute For Return?
The IRS has the right to file a return for those taxpayers who didn’t file taxes for a certain tax year. Moreover, the IRS can file an SFR if its agents determine that an original tax return is fraudulent.
The return the IRS files uses the taxpayer’s information from Form W2 or Form 1099 and all other information the IRS can acquire from third parties.
It’s important to note the SFRs don’t contain all tax deductions or credits a taxpayer is eligible for, which commonly results in high tax liabilities. Taxpayers have the right to file a tax return after the IRS files SFR and appeal the tax liability the IRS is seeking to collect.
However, you’ll have a narrow window to take action because the deadline for filing an original tax return is thirty days.
Please note that taxpayers who are exempted from filing taxes can only provide proof they’re not required to file taxes if the IRS files an SFR for them.
A Brief Analysis of the Section 6020(b)
The §301.6020(b) section of the Treasury Regulations outlines the procedures the IRS can initiate if a taxpayer doesn’t file a tax return for over a year. You should remember that the SFR program allows the IRS to assess a tax return over a period longer than three years.
Section 6020(b) also stipulates that the SFR can be prepared and signed by the Commissioner or an authorized IRS officer. The SFR document must contain the following information:
- Taxpayer’s name and identification number
- Information required to calculate the tax liability
- Substantial proof that the document is SFR created under the Section 6020(b)
The IRS uses Form 13492 to file SFRs. Sometimes, the IRS system generates ASFR, an automatic Substitute For Return. ASFRs are accompanied by IRS Letter 2566, with a thirty-day notice.
Section 6020(b) prevents the IRS from filing dummy returns containing only a taxpayer’s name, address, and social security number. However, dummy returns with a revenue agent’s report attached to them have the status of legal document.
The IRS SFR Limitations
SFRs and ASFRs are considered sufficient for legal purposes as long as they’re properly signed, and tax liabilities are calculated correctly.
The IRS faces a number of limitations when filing SFRs, as evidenced by a long history of cases in which courts ruled that the IRS isn’t required to prepare SFRs.
Here are a few examples of situations when SFRs are not legally sufficient:
- SFRs cannot contain itemized deductions – The IRS doesn’t have the right to claim tax deductions on a taxpayer’s behalf.
- SFRs cannot assign tax liability to an account before informing taxpayers – The IRS must inform taxpayers how much they owe before assigning tax liabilities to their accounts.
- The IRS cannot file SFRs jointly – SFRs that were filed jointly aren’t considered legally sufficient because the IRS can’t make this decision for a taxpayer. Taxpayers can opt to file an original tax return jointly after the IRS prepares and files SFR.
How Does the IRS SFR Process Look Like?
The IRS SFR process takes place in several stages. You’ll receive a letter from the IRS informing you that you didn’t file tax returns or pay taxes for a certain number of years.
The CP2566 Notice Letter will contain tax liability, penalty, and interest calculations.
Please note: Signing this document means you accept the tax liabilities, penalties, and interests the IRS wants to collect. Don’t sign the CP2566 Notice Letter if you want to file an appeal.
You’ll have thirty days to file Form 1040, initiate the standard tax return processing procedure, or supply evidence that you’re exempt from filing taxes.
Taxpayers who don’t file taxes after the one-month deadline expires will receive a Statutory Notice of Deficiency (SND). You can file an appeal to the US Tax Court up to 90 days after you receive the SND. However, if you ignore the SND, the IRS will initiate the collection process.
Please visit choicetaxrelief.com if you need assistance filing an appeal.
The Best Course of Action after the IRS Files an SFR
Filing an original tax return after the IRS files an SFR is the best course of action because it would enable you to use the advantages of the regular tax filing process.
SFRs don’t contain tax credits or itemized deductions you’re eligible for. You cannot claim these credits or deductions unless you file a tax return. Hence you’ll likely manage to lower the tax liability and ultimately have to pay less to settle your tax debt.
Optionally, you can appeal the IRS’s assessment of your tax liability but be prepared for a slow and long legal battle if you choose this path.
The IRS offers several tax relief programs to taxpayers who need help paying their tax debts in full. Depending on your preference and current financial situation, you choose one of the following options:
- Select a monthly payment plan or long-term installment agreement.
- Accept the Offer in Compromise that allows you to settle the debt for less than what you owe.
- Request the Hardship Status (Currently Not Collectible) to delay paying your tax debt for the time being.
Potential Fines and Penalties
The IRS SFR doesn’t indicate that you’ll have to pay additional fines or penalties. The SFR the IRS filed already contains all interests and penalties for your tax account.
However, you may have to pay the Failure to File penalty if you decide to file an original tax return after the IRS files the SFR. The sum you’ll have to pay depends on various factors, but in most cases, you’ll have to pay between 25% and 100% of the tax shown on your return.
That’s why you must first calculate the Failure to File penalty before filing a tax return after the IRS initiates the SFR procedure.
Frequently Asked Questions
The IRS files substitute returns if a taxpayer doesn’t file a tax return twelve or more months after the filing deadline. SFRs don’t contain all tax deductions and tax credits a taxpayer can claim, so they commonly have high tax liability values.
Doubt as to Liability is essentially an Offer in Compromise that allows taxpayers who doubt the IRS’s assessment of their tax debt to raise a dispute. In some cases, filing the Doubt as to Liability can eliminate a portion of tax liability created by unfiled tax returns.
The IRS uses the § 6020(b) code to denote SFR and refer to its legislative framework.
There’s no limitation regarding how far back the IRS can go when filing an SFR. The agency will file an SFR if it detects that a tax return wasn’t filed for a certain taxable period, even if it’s ten or more years old.
Talk to a CPA
Every SFR case is different. That’s why you shouldn’t choose your strategy before you speak to a CPA. Contact choicetaxrelief.com via email or by calling 866-8000-TAX if you need advice on how to approach SFR and the best course of action.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.