SFR - Substitute for Return

SFR - Substitute for Return

• When a taxpayer does not file a return for one year or many years, frequently the IRS will file the return(s) for you.  These educated guesses are called "proposed assessments."  If you get a letter from the IRS, and it says "Notice of Proposed Assessment" at the top of the letter, then you have just received a personal invitation from the IRS to file your back taxes.  
• When the IRS files a Substitute for Return (SFR), most of the time the taxpayer will end up owing significantly more in back taxes than if they had filed themselves.  SFRs do not take into account all of the allowable exemptions and deductions available to the taxpayer.  People are free to arrange their financial affairs in such a way to take advantage of tax laws.  Because the IRS may not know every tax deduction and credit you qualify for, the only way the IRS can accurately know how much you owe, is for you to tell them, by filing a tax return.
• When the IRS files a return for you, they are not doing so to to make your life easier or to do you a favor. Without a return filed, no tax debt will officially show up in the IRS records. The IRS files SFR so that they can assess a tax debt on delinquent filers, contact them about their past due tax returns and begin collection activity if necessary.
• When the IRS files an SFR for a taxpayer, it is most often, but not always, beneficial to the taxpayer to re-file the return and have the back tax debt assessed properly. For people with large amounts owed, this can often reduce the amount of taxes to a level which is more reasonable to pay back. In some cases, however, it may not be a benefit to the taxpayer to re-file the return and it may actually be better to just accept the SFR return filed by the IRS.
• An SFR does not start the running of the limitations period on assessments and collection.
• IRC §6501(b)(3) Return executed by Secretary 
• Notwithstanding the provisions of paragraph (2) of section 6020(b), the execution of a return by the Secretary pursuant to the authority conferred by such section shall not start the running of the period of limitations on assessment and collection.
• IRC §6501(c)(3) No return 
• In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.
• But a taxpayer may still get a CSED after the execution of an SFR. Under Internal Revenue Manual 5.1.19.3.15, if the IRS chooses to do an SFR, and the taxpayer fails to respond to the subsequent 90-day notice, then the IRS makes a deficiency assessment. The ten-year limitations period starts to run on that date.

IRM 5.1.19.3.15 (01-01-2006)
Substitute for Return

1. When a taxpayer fails to file a timely income tax return or files a false or fraudulent return, the Service may execute a return under the authority of the IRC 6020(b) deficiency procedures. If the taxpayer fails to respond to the 90 day notice, the Service makes a deficiency assessment. The Service may also make a deficiency assessment if the deficiency is upheld by the Tax Court. Upon that assessment, the 10 year period of limitations on collection, provided for in IRC 6502(a)(1) begins.
2. If the taxpayer later files their own "original" return showing a tax liability smaller than the assessed liability, and that return is accepted by the Service as filed, the tax liability may be reduced to show the amount of tax reflected on the taxpayer's return. The original CSED date remains intact.
3. If the taxpayer's "original" return reflects more tax than that assessed from the statutory notice based on the section 6020(b) return, then an additional assessment is input for the increased amount. In this scenario, the original CSED remains intact and a second CSED will be systemically established based on the additional assessment.