FAQ: What is a substitute for return (SFR)?

Under Code Sec. 6020, the IRS has the authority to prepare and file a substitute tax return for a taxpayer who fails to file a timely return. If a taxpayer does not file a return or cooperate with the IRS on a substitute return, the IRS can prepare and sign a substitute return based on the information it has.

Requirements

A substitute return must satisfy the requirements of Code Sec. 6020(b). The document must identify the taxpayer by name and taxpayer identification number; provide sufficient information to compute the taxpayer’s tax liability, and purport to be a return. The return must be signed by an authorized IRS employee to signify that the IRS adopted the document as a return for the taxpayer.

Uses for an SFR

An SFR that satisfies Code Sec. 6020(b) is treated as a valid return filed by the taxpayer for determining penalties for failure to file a return, failure to pay the tax shown on the return, and failure to pay estimated taxes. The IRS can use the SFR to satisfy its burden to produce evidence before a court, in support of the claimed penalties. However, the IRS cannot use the SFR to impose accuracy-related penalties. Despite its treatment as a return for tax and penalty purposes, an SFR does not terminate the statute of limitations for failing to file a return, and is not treated in a bankruptcy proceeding as a return that the debtor can use to obtain a discharge of tax debts.

Example of SFR

In a 2014 Tax Court case, Rader, 143 TC No. 19, CCH Dec. 60,067, the IRS also provided a Form 13496, IRC Section 6020(b) Certification; Form 4549-A, Income Tax Discrepancy Adjustments; and Form 886-A, Explanation of Items. The IRS did not include a Form 1040. The court concluded that the SFR was valid – the combination of documents filed by the IRS agent for the taxpayer was sufficient to be a valid SFR.

In Rader, the taxpayer, a plumber, filed no returns and paid no taxes. An IRS agent examined taxpayer’s bank records to determine deposits that could be unreported income, after verifying that taxpayer continued to practice his livelihood. The IRS also examined information returns filed by the taxpayer’s customers who paid him for services. The IRS concluded that the taxpayer had income of $350,000 or more for the years at issue. The taxpayer failed to furnish any evidence of deductible expenses to offset the income, and the court did not impute any deductions.

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Content provided by CCH. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.

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