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What is a Substitute for Return?

October 08, 2014  |   Tax Tips   |   Tags: , ,  

There are typically two kinds of people in this world: people who can’t wait to file their tax return and those who’d like to avoid tax season altogether. Generally, it’s the people who are expecting a nice refund check who rush their income tax returns to the IRS as soon as they receive their W2s. Everyone else hears “taxes” and envisions piles of boring and complicated paperwork, as well as the sizable check they’ll have to send along. As tempting as it may be to avoid filing, it’s usually a mistake that individuals ultimately regret when they learn the IRS has filed a Substitute for Return.

A Substitute for Return, or SFR, is created by an automated IRS system when an income tax return has not been received from a taxpayer. The system examines information submitted by third parties (like W2s and 1099s from employers or forms from financial establishments) to fill out a return for a taxpayer. When filling out the return, the system does not take into account the deductions, exemptions, or even the filing status that the individual would have selected. Instead, every Substitute for Return is prepared with the standard deduction and one exemption. Each one is filed as Single or Married Filing Separately, depending on the taxpayer’s marital status.

This means that the taxpayer will owe the most amount of money possible. This may be a huge difference from what would have been on an income tax return prepared by an individual, especially if that person usually files as Head of Household and has three dependents. In fact, some people who might have been owed a refund can wind up with a tax debt after a Substitute for Return is filed.

Should an individual receive an SFR, she or he may be able to amend what’s been filed by the IRS. If someone files an income tax return within 90 days of the IRS Notice of Deficiency CP3219N (which notifies a person that they have filed a Substitute for Return and are proposing a tax assessment), the IRS’s proposed assessment will not go on permanent file. However, if it has been longer than 90 days or the Substitute for Return’s assessment is already on file, one can still replace it with an income tax return. As long as the return is filed within 3 years of its original due date, any refunds owed may still be claimed.

However, if a taxpayer has several years of Substitute for Returns or has lapsed on filing for even one year, it may be necessary to contact a licensed tax professional. Such an individual will work hard to ensure that any income tax returns that need to be filed are prepared accurately. He or she can also work with the IRS to prevent any possible collection actions.