What to know about the IRS substitute for return
If you've ever missed the deadline to file your taxes — or skipped a year entirely — you might assume it just slips under the radar. But that's not how the Internal Revenue Service (IRS) operates. Eventually, the agency catches up to the issue, and when they do, they might file something called a substitute for return, or SFR, on your behalf. Sounds helpful at first glance, right? After all, maybe the IRS is just trying to help you out and save you the trouble? Well, not quite.
The IRS substitute for return is basically a ghost tax return. They file it for you when you have unfiled tax returns. But unlike a return you'd submit, which could include deductions, credits and adjustments that lower your tax bill, a substitute for return is very bare-bones. It's not built to work in your favor; it's built to get you into the system and kick off the collections process if you owe money for your taxes.
If you've received a notice that the IRS has filed a substitute for return for you — or you think you might be at risk — it's important to understand what that means and how it can affect your financial situation. Below, we'll break it down in simple terms.
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What to know about the IRS substitute for return
The substitute for return is the IRS's way of saying, "We waited for your tax return, you didn't send it, so we made one for you." It's used when the IRS has information that shows you had income during a particular year but didn't file your taxes.
To create the substitute for return, the IRS uses third-party information like the W-2s, 1099s and other documents that are reported to them. However, they only use the income information. They don't account for any deductions you may qualify for, like mortgage interest, business expenses or even dependents unless they're clearly documented. This usually results in a higher tax liability than if you'd filed yourself.
Once the IRS prepares the substitute for return, they send you a Notice of Deficiency, usually by certified mail. This lets you know what they think you owe and gives you a chance to respond or file your actual return. If you don't reply within 90 days, they'll finalize the substitute for return and begin collection efforts based on that return.
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How an IRS substitute for return can impact your taxes
First and foremost, a substitute for return typically leads to a bigger tax bill. Since the IRS doesn't include deductions or credits in your favor, the amount you owe will often be inflated compared to what it likely would've been if you'd filed yourself. That means you could end up owing thousands more than necessary for your taxes.
The IRS can also start applying penalties and interest based on the amount from the substitute for return. These add up quickly — sometimes faster than you might think. And even if you eventually get around to filing the correct return, you might still owe interest and penalties from the original due date.
Another issue is that once the IRS finalizes a substitute for return and you haven't responded, they can begin enforced collection actions. That includes wage garnishments, bank levies and tax liens. This process can be incredibly stressful and damaging to your financial stability. And while you can still file your original tax return after the substitute for return is done, fixing the problem isn't instant. It takes time to process, and in the meantime, the collection efforts might keep going.
If you're self-employed, things get even trickier. The IRS usually classifies all income as subject to self-employment tax without subtracting any business expenses. So if you had $60,000 in gross revenue but $30,000 in expenses, the SFR will treat it like you earned a full $60,000 in net income, which massively inflates both your income and self-employment taxes.
The bottom line
The IRS substitute for return might sound like a helpful safety net, but in reality, it's more like a red flag — and a warning. It's the IRS's way of getting your unpaid taxes into the system and starting collection actions if necessary, so it's not something to ignore.
If you've received a notice about a substitute for return or suspect one might be coming, the best thing you can do is take action quickly. File your original return, ideally with help from a tax professional, and make sure all your deductions and credits are properly included. Even if you can't pay the full amount right away, filing can stop the clock on some penalties and prevent things from getting worse.
And if you're feeling overwhelmed, don't go at it alone. There are tax professionals, tax relief companies and even programs through the IRS that can help you sort things out, but the key is to face it head-on. Because when it comes to taxes, doing nothing is usually the most expensive option.
