If you simply forget to file your return and miss your due date, the IRS won’t do much if you go ahead and file. If you’re due a refund on the return, you won’t even get hit with late filing penalties or interest. However, if the IRS notices you didn’t file your return and should have, the IRS could file a return for you. This often results in an adverse bottom line, but you still have the option to correct the return the IRS files for you.
Third Party Income Information
Companies you work for and other institutions that pay you money all report to the IRS. All the W-2 and 1099 forms you receive at the end of the year are also sent to the IRS. The IRS enters information from these forms into its computer system and attaches the data to your account. If you don’t file a return to report the income you received, the IRS computers will pick up on it and scan its systems for other information that determines whether you have a requirement to file.
Taxpayers who earn less than a certain amount, based on age and filing status, may be exempt from filing a return. As of 2012, a single taxpayer under age 65 who has less than $9,500 in taxable income is not required to file. The income limit changes each year, but always equals the standard deduction for your filing status, plus the standard exemption amount for yourself, and your spouse if you file a joint return. Certain types of non-taxable income, like Social Security payments under $25,000, are excluded from the income calculation. However, some types of income must be reported regardless of whether the gross income test is met, such as those with 1099-MISC self-employment income. If you have a filing requirement and don’t file, the IRS will start sending letters requesting your return.
Substitute for Return
If you don’t respond to IRS letters requesting your return, the IRS will file a substitute return for you. The IRS only uses third-party income information received for the tax year to prepare the return. The IRS is unable to determine your correct filing status, number of dependents you’re eligible to claim, and any credits or deductions you’re entitled to based on third-party information alone. Because of this, a substitute return yields an incorrect tax liability in most cases.
If your substitute return -- or SFR for short -- renders an amount owed, the IRS will assess penalties and interest and begin collecting on the balance. Collection activity on the amount may involve tax liens, bank levies and wage garnishments. However, if a substitute return is filed for you, you don’t have to stand by while the IRS collects on a balance that may be incorrect. You have the right to protest the substitute return by filing your original tax return. To do this, you’ll file a regular 1040 form (not a 1040-X), write “SFR Protest” on the top and send it to the regular filing address associated with your state. The IRS processing center will send it to a special unit that handles substitute return protests. SFR protests can take several weeks to process, but collection activity can’t continue during the processing time.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.