If you have not filed a tax return in more than a year, the IRS can prepare a tax return on your behalf using information from employers, banks, and other third parties. This is what is referred to as a substitute for return (SFR). (Read more: “How Do I File Delinquent Tax Returns If I Don’t Have Any Records“)
The IRS typically files a substitute return so they can assess the taxes you owe and begin the appropriate collection activities. Collection actions include levying your bank account, garnishing your wages, or filing a federal tax lien on your property.
When Does the IRS File a Substitute Return?
The IRS files a substitute return when you fail to file tax returns for 12 or more months. When the IRS decides to file a substitute tax return on your behalf, they will not bother to check for the best tax deductions or credits. The agency leverages the standard deduction even if you have enough deductions to itemize, meaning you are likely to owe higher taxes to the IRS.
What Is the IRS Substitute Return Process?
The IRS begins the substitute return process by sending a letter informing you they have not received your tax returns for a specified number of years. The letter includes the tax liability and any penalties plus interest.
It also informs you that you have 30 days to submit a completed 1040 form or a letter specifying the reasons as to why you are exempt from filing a tax return.
If you fail to respond within 30 days, the IRS sends a statutory notice of deficiency (SND) letter informing you that the agency will assess the tax you owe the IRS, including penalties plus interest. The SND also informs you of your rights to appeal IRS actions in the US Tax Court.
Once you receive the SND notice, you will have 90 days from the date on the letter to respond. If you ignore the SND letter, the IRS will assess taxes and initiate collection efforts.
Will You Owe the IRS More If You Have a Substitute Return?
As mentioned earlier, you will probably pay more tax if the IRS files substitute returns for you. In most cases, the substitute return filed by the IRS has a greater tax liability than when you file your own tax return. When you prepare your tax return, you can claim deductions and credits omitted by the IRS. The IRS reviews your claims and makes appropriate tax adjustments to lower your tax liability.
However, the IRS makes these adjustments and gives refunds only if you filed returns on time. Unfortunately, by the time a substitute return is filed, the statute of limitations for claiming refunds might have already lapsed. This means you could owe more to the IRS and also lose your claim to a tax refund.
Can You Still File an Original Tax Return After a Substitute Return Has Been Filed?
Yes, you should file your original tax return even if the IRS has already prepared a substitute return on your behalf. Filing your tax return will replace the substitute return, thus allowing you to take advantage of better filing status and deductions, credits, or exemptions to which you are entitled.
Can You Appeal a Substitute Return?
You can dispute a substitute return and assessed taxes in the US Tax Court if you feel the IRS actions infringe on your rights as a taxpayer. You have 90 days from the date of the substitute return notice to file a petition with the Tax Court.
What If You Can’t Pay the Full Amount You Owe the IRS After a Substitute Return Is Filed?
If you cannot immediately pay the full amount you owe the IRS after a substitute return is filed, you can leverage several tax relief programs to settle your tax debt. This includes setting up a monthly IRS payment plan or long-term installment agreement, submitting an Offer in Compromise to settle your debt for less than what you owe the IRS, or requesting hardship status (Currently Not Collectible) to temporarily delay having to make any payments.
What Is a CP2566 Notice Assessment Letter?
A CP2566 notice is a letter sent by the IRS once it completes your substitute return and tax assessment. The CP2566 notice informs you that the IRS has filed a substitute return on your behalf, and you have only 30 days from the CP2566 notice date to respond by:
- Submitting Form 1040.
- Signing and dating the “Consent to Assessment and Collections” form attached to the CP2566 notice. Keep in mind, by signing, you agree to the tax amount assessed.
- Sending a letter explaining why you are exempt from filing a tax return.
- Filing an appeal.
Read more on “Common IRS Notices“.
What Is a CP3219N Notice of Deficiency?
If you fail to respond to the CP2566 notice, the IRS sends a CP3219N notice of deficiency, informing you that the agency has calculated the tax you owe the IRS, plus penalties and interest, based on available information in their system.
Get Help When You Have a Substitute Return
An IRS substitute return carries a higher tax liability than filing your own tax return. The best way to avoid a substitute return is to file your tax returns on time. If you have neglected your tax returns for years and have received a substitute return notice, seek help from a tax expert to evaluate your options, file past due tax returns, and settle your tax debt.
How Can Wiztax Help?
We exclusively deal with IRS back tax issues at Wiztax. If you need help paying back taxes, we have a solution. Call us today at (866) 568-4593 to learn more about how we can help, or start here to take our free online evaluation.
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