Key takeaways:
- The IRS can file a substitute return on your behalf if you don’t, but this often leads to paying more than you owe.
- An SFR only includes information the IRS has about your income—it misses many deductions and credits that can lower your tax bill.
- You should file an actual tax return as soon as possible to lower your tax bill and claim any refunds.
What is a Substitute for Return?
An SFR is the IRS’s way of filing a tax return on your behalf when you haven't done so yourself. The IRS uses only the income information they have on file, such as W-2s, 1099s, K-1s, and other income documents reported to them by third parties. While this might seem helpful, it has a serious downside.
The IRS doesn't have much information on the tax deductions and tax credits you might be eligible for, so they don't include them on the SFR. That means no deductible business expenses, out-of-pocket medical expenses, health insurance premiums, Earned Income Tax Credits, dependent care expenses, donations to charity, or other write-offs. You miss out on potential tax savings and owe the highest possible tax liability.
The timeline for an SFR typically starts at least 12 months after the tax filing deadline (or extended due date) has passed and you haven’t submitted a required tax return. The IRS will send you notices, and if you don’t respond, they’ll proceed with filing the SFR. This process can take several months, but once completed, you’ll owe the full amount the IRS determines—often far more than if you'd filed the return yourself.
Further reading: How Long Can You Go Without Filing Taxes?
How do I know if the IRS filed an SFR for me?
There are a few ways to tell if the IRS filed a Substitute for Return on your behalf:
- IRS notices. The most obvious sign is receiving notices from the IRS. First, the IRS sends a CP59 notice saying they have no record of your tax return. If you don't file a return or let the IRS know why you don't have a filing requirement because you didn't have enough income, the IRS will eventually send a Notice of Deficiency (CP3219N). This notice informs you that the IRS calculated your taxes without your input and outlines the income reported to the IRS and the amount of tax they believe you owe.
- Account transcript. You can request your tax transcripts from the IRS, either online through the IRS website or by mail. The transcript shows whether the IRS filed an SFR in your name. Look for entries like "Substitute for Return" or "Automated Substitute for Return" on the transcript.
- Account summary. Log into your IRS account online and check your account summary. An SFR should be reflected in your account, showing the balance the IRS has calculated based on their information.
You must act quickly to address your unfiled returns if you discover the IRS filed a Substitute for Return. Filing your tax return can minimize failure to file penalties and ensure you don't pay more than your correct tax liability.
Further reading: How to File Back Taxes Without Records
What should I do if the IRS filed an SFR for me?
Once the IRS files a Substitute for Return (SFR), the best course of action is to file an actual tax return as soon as possible. Filing a return yourself supersedes the SFR, allowing you to claim all the tax deductions and credits you’re eligible for—potentially lowering your tax bill significantly.
Even if the IRS calculates a balance due, submitting your return adjusts the amount based on the information you provided. This could turn a large tax bill into a much smaller one or even result in a refund.
Better yet, if you're due a refund within three years from the original filing date, you're eligible to receive it. The IRS will process your return as if the SFR never happened, and you'll get back any money that’s rightfully yours.
Filing your return puts you back in control of your tax situation and ensures you aren’t overpaying the IRS. Next, we'll cover what to do if you owe money to the IRS and can't afford to pay.
What happens if I can't pay the amount I owe when I file my return?
Many people don't file a tax return because they expect to owe tax and can't afford to pay it. Don’t panic, and don't avoid filing a return.
The IRS offers short-term and long-term installment plans, allowing you to pay off your balance over time. A short-term plan gives you up to 120 days to pay in full, while a long-term plan lets you spread payments over an extended period—typically up to 72 months.
You can apply for a payment plan online through the IRS website or call the IRS at 1-800-829-1040 to set it up. While the IRS will continue to charge interest and penalties while you have an outstanding balance, you won't have to worry about the IRS collection process as long as you make payments.
Further reading: Tax Relief Programs: Sorting Out Your Back Taxes
How Bench Can Help
Dealing with tax debt can be stressful and exhausting, especially if your bookkeeping isn’t up to date. This is where Bench can step in to make catching up on tax returns manageable. Bench specializes in helping small business owners get their financial records in order—even for prior tax years where your records might be incomplete or missing.
Our professional bookkeepers will work with you to recreate your financial history and capture all your income, expenses, and deductions. With up-to-date bookkeeping in hand, you can confidently file your tax return, knowing you’ve included all the deductions and credits available to maximize your tax savings and avoid the headaches and hefty tax bills that come from relying on a substitute return.
