By Senior Tax Advisor & Enrolled Agent, Lakeline Tax

The letter arrives with a number on it, and the number is wrong. That is the usual
introduction to a Substitute for Return. The IRS has calculated a liability for a year
you did not file, and the figure bears little resemblance to what you would have owed
had you filed yourself.

That gap is not an error. It is how the mechanism is designed to work.

 A Substitute for Return is a return the IRS prepares on a taxpayer’s
behalf under IRC §6020(b), using income reported by third parties. It generally allows
no itemized deductions, no credits, and the least favorable filing status, so the
resulting assessment usually exceeds the correct tax. Filing an accurate original return
afterward is permitted and is the standard corrective step.

How you get there

The sequence is predictable. The IRS identifies a filing gap from information returns
already in its systems, then works through notices — commonly CP59 or CP63, then Letter
2566 proposing an assessment.

If those go unanswered, the IRS issues a Statutory Notice of Deficiency under IRC §6212.
This is the 90-day letter, and it is the point at which the matter becomes procedurally
serious: 90 days to petition the Tax Court, after which the tax is assessed and
collection begins.

Most people we see arrive after that point, often because the notices went to an old
address.

What the SFR leaves out

A Substitute for Return is built from what third parties reported. It does not know
anything a return would tell it.

Consider brokerage activity. A Form 1099-B reports gross proceeds from a sale. It
frequently does not report cost basis in a form the IRS applies automatically —
particularly for equity compensation, where the basis includes compensation income
already taxed through payroll. Absent a filed return establishing basis, the computation
can treat proceeds as though basis were zero.

The same logic runs through the rest of the return: no itemized deductions, no
dependents, no business expenses against Schedule C gross receipts, no credits, and
single or married-filing-separately status by default.

Replacing it

An SFR is an assessment, not a final determination of your tax. An accurate original
return filed afterward is processed as a claim to adjust it.

Three practical points.

The correct return generally must be complete and substantiated. Replacing an SFR is
not an abbreviated process.

The collection statute has already started. Under IRC §6502, the ten-year period runs
from assessment — including an SFR assessment — even though the taxpayer never filed.

And a balance frequently remains after the adjustment. Correcting the computation is one
step; addressing what is genuinely owed is the next.

SFR vs. taxpayer-filed return

Key Takeaways

– **An SFR is an estimate built from third-party data**, not a determination of your
actual liability.
– **It can be replaced.** Filing an accurate original return afterward is the standard
corrective route.
– **The collection clock is already running.** An SFR assessment starts the ten-year
period under IRC §6502 even though you did not file.

Ready to stop reacting and start planning? Book a free 15-minute strategy call at
lakelinetax.com.

Sources

• IRC §6020 
• IRC §6212
• IRC §6501
• IRC §6502 
• IRS “Filing past due
  tax returns”

Internal links:

Unfiled Tax Returns

IRS Collections, Liens, and Levies: Understanding Which Rights Remain

How Many Years of Back Taxes Do I Have to File?

Tax Resolution Services