Posted by The TaxAdvocate Group, LLC

How to Use Substitute for Return

How to Use Substitute for Return

If a taxpayer fails to file a return for a length of time, the IRS will use available information to prepare a substitute return. The IRS will then use the return to arrive at an assessment of tax payable and begin activities aimed at collecting the tax due.

To illustrate this with an example, we assume that John, an independent contractor working for several firms receives 1099-MISC forms from those companies detailing the income they paid him. However, due to a very busy schedule, John was unable to file his tax returns for tax years 2014 and 2015. When a computer at the IRS detected the failure by John to file his returns for those tax years, it sent him a letter. The letter informed John about the tax owed by him for those tax years as calculated on the basis of information known to the IRS.

When a taxpayer faces the sort of situation that John faced, he/she can either file an original return for the unfiled years or send a petition to the tax court within 90 days of the date of receipt of the statutory notice of deficiency. Filing an original return is considered the better choice.

The Letters that Come in the Mail

A taxpayer does not usually know that a substitute tax return has been prepared by the IRS until he/she receives an assessment mail informing him/her that the IRS proposes to make an assessment of tax due from the information already available with it (1099 and W-2 forms and any other documents).

The letter will list a summary of income sources used to compute the tax due. Once the taxpayer has to act within 30 days of receipt of the assessment letter.

  • He may choose to file an original return, signed and completed.
  • He may choose to consent to the assessment and fill in a dated Consent to Assessment and Collection form
  • He may send a letter explaining why he isn’t required to file a return for the tax years in question.

The IRS Follows Up on the Assessment Letter with the Statutory Notice of Deficiency

The assessment letter must be responded to within 30 days of receipt. If the taxpayer does not respond within the said period, he will receive a second letter from the IRS. This second letter, known as the Statutory Notice of Deficiency, is received through certified mail which requires the receiver to sign to acknowledge receipt thereof. The Statutory Notice of Deficiency is also known as Letter 3219-B.

The notice of deficiency is sent by the IRS on the assumption that the agency is prepared to act to collect the unpaid taxes, as well as interest and penalties, as though the tax assessment the IRS informed via the first letter is accurate.

The receiver of the notice of deficiency is best served if he reads the letter carefully. The receiver of the letter is advised in the letter of his or her right to call the assessment into question in Tax Court. Once the taxpayer receives the notice, he is requited to act within 90 days. He must choose one of three permitted actions.

  • He may choose to file an original return, signed and completed.
  • He may choose to consent to the assessment and fill in a dated Consent to Assessment and Collection form
  • He may send a letter explaining why he isn’t required to file a return for the tax years in question.

It is possible occasionally that a person may not receive one or both of the notices. In such cases, the assessment of tax made in the substitute return will be discovered if and when the client decides to file an original return to compensate for the unfiled returns. The IRS has the authority vested by the House to file a substitute tax return based on any information it has on its files (Internal Revenue Code 6020).

When Will the IRS Have to File a Substitute Return?

Such a situation arises when an individual fails to file his/her return for a few years. The IRS finds it has 1099 and W-2 forms furnishing information about the person’s income. The IRS will then decide to file a substitute return for the unfiled years using the information it finds on those documents.

The TaxAdvocate Group, LLC
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