Too often, people will file an extension for their federal tax return, but for reasons unknown, forget to file the return by the extension due date. In this situation you are giving the IRS the authority, by law, to file a tax return for you. The IRS will file a substitute return based on information provided to it by other sources. In addition, it will not include any expenses, deductions, or exemptions to which you may be entitled.
After the substitute return, or SFR, is filed, the IRS will send a notice asking you to consent to the proposed assessment of tax. If you fail to respond, a statutory notice of deficiency is issued. If you fail to respond to the notice of deficiency, then IRS will start the collection process. The collection process includes liens, levies, wage garnishments, and seizure of property.
I know you are wondering how this is possible. Well, the IRS has the authority to prepare SFRs under the Internal Revenue Code. Pursuant to section 6020(b), the IRS must first determine that you are liable for filing a tax return and has failed to do so. Thus, if you fail to respond to the notices, the IRS uses information, such as W-2s and 1099s, to prepare the SFR. Then it assesses tax, interest, and penalties based on the substitute return. In preparing the SFR, the IRS only allows the standard deduction and uses a filing status of either single or married filing separately.
To summarize, when you fail to file your tax return you are giving the IRS the authority to file for you. You are also electing to forego many of the deductions that you are allowed by law. However, if the IRS does file a SFR you can still file your return. Filing your return after a SFR has been filed is known to reduce the tax liability in many cases. If you have unfiled returns, or if the IRS has filed a substitute return, please contact a tax professional.
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