The IRS can legally file a tax return on your behalf which is called a Substitute for Return (SFR). If this happens, you most likely will not be getting the benefit of the doubt on anything. The IRS will likely only estimate your tax liability using old W-2 & 1099 forms. They may also just use statistics of income in your area to make a guess at your income. When the IRS prepares a return on your behalf they will send you a copy to your last known address and ask you to sign it. If you don’t sign it, they will still file it on your behalf. It is never a good idea to have the IRS file an SFR for you because you will lose various rights you have and will likely end up paying way more in taxes.
The reason why the IRS will complete a tax return on your behalf is so they can begin collections against you. The IRS cannot begin collections until a tax amount has been assessed. Once a tax amount has been assessed they will have 10 years to collect that amount.
Below are the reasons why you should prepare and send in a different return than the one the IRS has prepared on your behalf.
- You will likely be assessed with a higher tax bill than if claimed your actual income and deductions
- The IRS can audit that year forever. If you do not sign the SFR and the IRS files that return for you, they can always hold that tax year against you
- If you ever declare bankruptcy it is very unlikely that these taxes will be able to be discharged in it if the IRS files a SFR
- Tax Penalties will likely be much higher because they are charged based on the amount of tax liability assessed
If the IRS has filed a Substitute for Return on your behalf then it is in your best interest to prepare a tax return to replace that return. It is very likely that if the IRS claims you owe $25,000, you probably can get that down by about half after you apply your proper deductions and lower the penalties and interest that have been charged.