Substitute for Return

Key Takeaways

• If you don’t file, the IRS will send multiple notices to your last known address.
• If you don’t respond, they’ll file a Substitute for Return based on tax forms received from other entities.
• Since the SFR does not include deductions, credits, or dependents, it typically shows a higher-than-usual tax liability.
• Although filing your own return is generally the better option, there are circumstances where it’s better to leave the SFR alone.

Why Did the IRS File a Return for You?

The IRS files a return on behalf of a taxpayer when the taxpayer is legally required to file but fails to do so. They don’t do this right away; they generally send notices CP59, CP516, and CP518, reminding you to file and advising you of their next steps if you do not file. 

If those notices are ignored, they will then file a Substitute for Return. To do so, they estimate your income based on the tax forms and data they have. For example, they may use W-2s from employers, 1099-Ks from payment processors, 1099-Bs from investment houses, 1099-NECs from clients, etc.

What Happens After an SFR is Filed?

After filing the SFR, the IRS will typically send you a Notice of Deficiency. This letter explains that if you do not respond in 90 days (150 days if sent out of the country), the IRS will officially assess the tax against you. The IRS will also add penalties and interest backdated to the original due date of the return. 

If you don’t appeal by the deadline, the assessment will become final, and the IRS will start the collection process. They typically attempt to collect from taxpayers voluntarily for several months, gradually ramping up the urgency of their notices and communications. If no payment is made and there are no efforts to rectify the tax debt, the IRS may then move forward with more aggressive collection efforts. These include tax liens on the entirety of your property, wage garnishment, bank account levies, seizure of your assets, and passport restrictions.

Can You Replace an SFR With Your Own Return?

Yes—even after the IRS has filed a Substitute for Return, you can still file your own tax return for the year in question. This allows you to include dependents, deductions, and credits that can decrease your balance due. In most situations, filing your own return is the best option.

If the IRS accepts your return, they will then recalculate your tax liability. This may lead to a substantially lower total amount due. If you have a lot of deductions and credits, you may even be owed a refund. As long as your return is filed within three years, you can still receive a tax refund if you are late. Your interest and penalties may also be decreased in line with your new total due.

When You Should File Your Own Return

In most situations, filing your tax return is the best financial option. It is rare for the IRS’s return to be better for you, particularly with the absence of credits, deductions, and dependents.

When Leaving an SFR in Place is the Better Option

If you’ve run the numbers and the IRS’s calculations are equal to your own—or if they are lower than what you’ve calculated—you may just want to leave the Substitute for Return in place. In this situation, filing your own return would only cost you more time and energy with little change to your final tax liability. This is fairly uncommon, as the SFR usually results in an inflated tax bill.

You may also not want to file a new tax return if you are a good candidate for an offer in compromise. An offer in compromise is when the IRS lets you settle your tax liability for less than you owe – the settlement amount is based on what you can afford based on your assets, income, and obligations. That amount doesn’t change regardless of how much your tax bill is, so filing a new tax return is just more work for you. For example, if you qualify for a $5,000 offer, that’s what you get to pay, whether you owe $7,000 or $100,000. 

Additionally, if the year for which the Substitute for Return was filed is near its Collection Statute Expiration Date (CSED), filing a new return may not be worth your time. The IRS cannot collect tax debts after the CSED. If the IRS only has a few months left to try to collect from you, a new tax return is just another item to add to your to-do list.

How to File a Return to Replace a Substitute for Return

Once you have decided that filing a new tax return is the better option for you, it’s time to gather the necessary documentation, fill out the necessary forms, and submit your tax return. Just like you would for any other tax return, you should gather your W-2s, 1099s, bank interest statements, proof of deductions, and all other relevant documentation. 

If you have missing documentation, as is often the case if the tax year in question is several years in the past, you may need to reconstruct your income by pulling bank statements, invoices, deposit logs, and receipts. Document your efforts to reconstruct your income so you can demonstrate to the IRS how you reached your final numbers. Tax professionals like those at McLaud Law P.C. can help use IRS-accepted practices to reconstruct income and expenses.

File your tax return by mail or work with a tax professional to prepare and send it. If your return is significantly different from what the IRS calculated on their Substitute for Return, include a Statement of Explanation or Form 8275. This is your chance to explain why your numbers are different from the IRS’s and provide any documentation or records you have.

What if You Can’t Afford to Pay the IRS?

Even if you cannot afford to pay what you owe in full, it’s still better to file your tax return and get an accurate picture of how much you owe. Additionally, this can curtail how much you owe in interest and penalties.

The good news is that the IRS is open to other payment options. While they would prefer to receive payment in full, they do provide other resolution options.

Payment Options

If paying in full is not an option for you, consider these potential payment options:

• Installment agreements: An installment agreement is a popular option for many taxpayers, as it’s fairly easy to qualify for and reduces your payments to a more reasonable monthly obligation. These are usually up to six years long, though the term can vary.
• Partial payment installment agreement: If you can’t afford that minimum payment, consider a partial payment installment agreement (or PPIA). This allows you to make smaller monthly payments if you can prove financial hardship.
• Offer in compromise: Like a PPIA, an offer in compromise requires you to show that paying in full would cause you financial hardship. The IRS considers a wide range of financial factors, including your income, assets, equity in your assets, and debt to determine how much they can reasonably expect to collect from you. If that is significantly lower than what you owe, they may accept your offer and allow you to settle your tax debt for less.
• Currently not collectible status: The IRS offers currently not collectible status to taxpayers for whom making any payments would result in financial hardship. A financial statement with supporting documentation is required.
• Penalty abatement: If you qualify for penalty abatement, either via first-time penalty relief or reasonable cause, you could see your final tax bill drop substantially.

When It’s Time to Call a Tax Pro

Working with a tax professional can give you peace of mind when you’re handling complicated tax matters like Substitutes for Returns and aggressive collection efforts. If you have received a Notice of Deficiency, this is a good time to reach out to a tax professional and figure out how to get caught up and avoid collection actions.

You should also consult a tax professional if the IRS has already placed a lien on your assets or is about to garnish your wages, seize your bank account, or levy other assets. These are incredibly serious collection actions that can have an immediate impact on your financial well-being, and you must take swift action to resolve your tax debt in another manner.

In general, if you’re feeling so overwhelmed by your tax situation that you cannot take action, a tax professional can give you a path forward. We often help taxpayers who have multiple years of unfiled returns, a variety of income sources, or complex tax situations that make your next steps unclear.

If the IRS has filed a Substitute for Return on your behalf, odds are good that filing a tax return will help you—but don’t assume that this is the case. Every taxpayer’s situation is unique, and we can help you decide which option is best for your needs. Call McLaud Law P.C. at 585-397-7785 or reach out online to schedule a free case evaluation. We’ll discuss what you’re dealing with and how we can help get you the best possible result.

Frequently Asked Questions

What is a CP3219N letter from the IRS?

This is a notice the IRS sends when they do not receive a tax return from you and you fail to submit a return after multiple reminders. CP3219N indicates that they have calculated what you owe and included a proposed assessment. The notice allows you to either agree with their assessment or appeal and file your own tax return. 

Is fixing a Substitute for Return always a good idea?

Filing a new return is usually a good idea, but there are a few circumstances where sticking with the Substitute for Return is better for you. If you’re unsure whether or not filing a new return is better for you, talking to a tax professional is your next step.

Can I leave an SFR alone if I can’t pay?

You can, but that doesn’t necessarily mean you should. Even if you don’t think you can pay, the IRS may still start collection actions against you. If they do, those actions will be based on the amount listed on your SFR, not the amount you would actually owe on a tax return. In this situation, filing an accurate return would likely still be better for you.

Does filing a real return restart the collection clock?

Filing a real return doesn’t typically reset the collection clock, although certain activities—filing for bankruptcy or requesting an offer in compromise—can pause the clock.

Can I qualify for CNC or an offer in compromise with an SFR on file?

Yes. In these cases, an SFR essentially stands in as your real tax return.

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.