IRS Substitute for Return (SFR): What Happens When the IRS Files Your Taxes for You

When taxpayers do not file required tax returns, the IRS may prepare a Substitute for Return (SFR) under Internal Revenue Code Section 6020(b). An SFR is not intended to benefit the taxpayer. It is a legally valid return that the IRS prepares using only the income information it has on file from third-party reporting sources. These returns routinely result in tax assessments that are far higher than what the taxpayer would owe if they filed an accurate return themselves. Understanding how SFRs are created and how they can be corrected is critical to avoiding unnecessary tax burdens.

How the IRS Creates an SFR

The IRS receives income information from employers, banks, brokers, and other payers through documents such as W-2 wage statements, 1099 income forms, 1099-R retirement distribution forms, and brokerage statements. If the IRS does not receive a corresponding tax return from the taxpayer, it uses this third-party information to create a Substitute for Return. When preparing an SFR, the IRS reports all income as fully taxable, applies only the standard deduction, excludes itemized deductions, does not allow any business expenses, and does not apply credits such as child tax credits, education credits, or earned income credits. The filing status used may also be incorrect if the IRS lacks full information. This minimal approach almost always produces an inflated tax liability.

Consequences of an SFR Assessment

Once the IRS completes a Substitute for Return, the tax is officially assessed and penalties and interest begin accruing immediately. The IRS may file a Notice of Federal Tax Lien and can move forward with enforcement actions such as bank levies or wage garnishments. At this point, the taxpayer loses the ability to dispute the IRS’s numbers unless they file an original return. These assessments can escalate quickly, especially for self-employed individuals who are entitled to significant deductions that were never claimed.

Correcting an SFR by Filing an Original Return

Taxpayers retain the right to file an original tax return even after the IRS has prepared an SFR. Filing an accurate return often results in a substantially lower tax liability, removal of incorrect income assumptions, application of missed credits, proper recognition of itemized deductions, and correct treatment of business expenses for self-employed taxpayers. Once the original return is filed, the IRS will generally replace the SFR assessment with the taxpayer’s return unless there is clear evidence of fraud or a substantial error.

Examples of Typical Reductions

Consider a self-employed taxpayer who received 1099 forms totaling $75,000. That individual may have legitimate expenses such as vehicle costs, supplies, equipment, insurance, and subcontractor payments. If the IRS prepares an SFR treating the entire $75,000 as taxable income, the resulting tax bill may be dramatically overstated. By filing an accurate return with a properly prepared Schedule C and supporting documentation, taxable income can often be reduced significantly, sometimes lowering the IRS balance by thousands of dollars.

Why Many Taxpayers Ignore SFR Notices

Many taxpayers fail to respond to SFR notices due to lost records, fear of owing large amounts, misunderstanding filing requirements, or life events that disrupted compliance. Others may have avoided filing for so long that multiple years of unfiled returns feel overwhelming. Despite these concerns, filing accurate returns almost always improves the taxpayer’s position compared to allowing an SFR assessment to stand.

How Professional Representation Helps

Tax professionals assist by reconstructing income and expense records, using bank statements and third-party documentation to recreate missing data, preparing accurate back tax returns, and communicating with the IRS to replace SFR assessments. Representation also helps address penalties, arrange payment plans if balances remain, and ensure that corrective filings do not trigger unnecessary enforcement actions. This structured approach results in more accurate assessments and more manageable outcomes.

Conclusion

A Substitute for Return is one of the IRS’s most powerful tools for assessing tax when returns are not filed, but SFR assessments are frequently far higher than what the taxpayer actually owes. Filing accurate original returns supported by documentation can significantly reduce these assessments and allow taxpayers to resolve their obligations with clarity, fairness, and control.