6.2 IRS Substitute for Return
6.2 IRS Substitute for Return aetrahan Tue, 01/31/2023 - 09:48A taxpayer may receive a notice from the IRS saying that an unbelievable amount of taxes is owed. This may happen if the taxpayer has failed to file a tax return and the IRS has filed a “Substitute for Return” (SFR). An SFR assumes that the taxpayer had certain income based on W-2s, Forms 1099, or income reported on prior tax returns. The large amount of taxes arises because the IRS does not apply any exemptions, deductions, or tax credits when it files an SFR. Generally, the alleged tax deficiencies can be substantially reduced if a correct original tax return is filed. The statutes of limitations for assessment and collection begun to run upon the filing of correct original tax returns for the years in question. Tax returns filed after an SFR should be filed with the IRS’s Fresno office.1
The IRS may file an SFR under one of two provisions of the IRC. An SFR under § 6020(b) does not start the assessment or collection periods because it is not considered a tax return for limitations purposes.2 In a § 6020(b) SFR, the IRS will normally assess a deficiency after the taxpayer fails to respond to the 90-day Notice of Deficiency letter. An assessment after the expiration of the 90-day period to contest the deficiency in Tax Court will start the collection statute of limitations.3 On the other hand, an SFR under I.R.C. § 6020(a) may qualify as a “return” for the purposes of starting the statutes of limitations. Also, an SFR may stop the running of the delinquency period for additional penalties for failure to file and failure to pay amounts due on the return.4 After notice and the expiration of the period to appeal the assessment by substitute return, the account transcripts should show that a return has been “secured” and this is the assessment and the beginning of the 10-year collection period.
Outside the Tenth Circuit, a taxpayer may file a tax return despite the existence of an SFR. The SFR does not deny the taxpayer’s right to contest the deficiency and the IRS’s choice of filing status in a Tax Court proceeding.5 In an SFR, the IRS usually uses the filing status of the last filed return, but the taxpayer may have married or had dependents and would want to change their filing status. If the SFR has been secured and the 10-year collection limit is near, you may not want to file a return as filing would reset the clock for another 10 years.
Taxpayers who have filed for Chapter 7 bankruptcy that did not file returns may also have SFRs. The Bankruptcy Code requires a taxpayer who seeks a discharge in a Chapter 7 bankruptcy to file all needed returns. They can’t rely on SFRs. In many circuits, a taxpayer is also barred from a bankruptcy discharge of taxes if the related tax return was filed late. Several courts have denied bankruptcy discharges where the related tax return was filed late, despite the IRS’s position that late filed tax returns don’t always bar bankruptcy discharge.6 Unfortunately, this is the position of the Fifth Circuit, which has jurisdiction over Louisiana. Fortunately, this does not apply when a taxpayer timely requests an extension to file a tax return and then files within that extension period.