Whether you failed to file your tax return or filed it but, for some reason, the Internal Revenue Service (IRS) has no record of it, the worst way to handle the situation is by not responding. Ignoring the issue will not make it go away. Instead, the IRS may pursue one or more remedies, including creating a Substitute for Return (SFR) on your behalf.
A poor substitute for filing your own tax return
The government will notify you that your tax return has not been received through a letter known as a Notice of Deficiency. The notice explains that you have 90 days to address the issue by filing your return or petitioning the United States Tax Court. If you do not respond within the required time frame, the IRS may move forward with preparing an SFR.
An SFR is exactly what it sounds like. The IRS prepares a return on your behalf using information such as reported wages and other income provided by employers, banks, and other institutions. The IRS will also calculate the tax owed, along with any penalties and interest, based on that return.
At first glance, this might not seem like a serious problem. After all, it might appear that the IRS is resolving the issue for you. In reality, however, an SFR typically does not include deductions, credits, or exemptions to which you may otherwise be entitled. These omissions, combined with penalties and interest, can result in a significantly higher tax liability than if you had filed your own return accurately and on time. Even after a substitute return is filed, filing your own return promptly can allow the IRS to revise the assessment, provided the information is accurate and properly supported.
Additional risks of ignoring the IRS
Even taxpayers who typically file on time may face additional consequences if a return is not filed. Potential outcomes include the following:
-
An audit of prior tax returns
-
Collection actions, including wage garnishment and asset seizure
-
Accrual of interest and penalties
-
Loss of any refund or tax credits you might have otherwise been due
-
Loss of refunds or tax credits that may otherwise have been available
-
Loss of Social Security earnings credits, which can affect future retirement or disability benefits
-
Criminal prosecution in more serious cases
None of these outcomes is preferable to filing a return. Even if you are already late, concerned about paying what is owed, or uncertain how to proceed, communicating with the IRS is generally more effective than ignoring notices in the hope that the issue will resolve itself.
You can learn about reducing audit risk by downloading our ebook, "The Five Ways to Avoid a Tax Audit."
Tax return late or substitute return filed?
You might feel uncertain about how to address a missing return or SFR prepared by the IRS. Understanding your options early can help limit additional problems. Our tax law firm advises individuals and businesses on resolving tax filing and compliance matters. Schedule a consultation with our legal team by calling 440-250-9709 to discuss your situation. We serve clients across the U.S. and internationally from our offices in Cleveland and Chicago.
