Not Filing? The IRS Substitute for Return Can Cost You Money
Failing to file a tax return can be a costly mistake. If you don’t submit your return, the IRS may step in and file a Substitute for Return (SFR) on your behalf. However, this IRS-prepared return won’t include deductions, credits, or exemptions you may qualify for—resulting in a higher tax bill than if you had filed yourself.
For expats and US taxpayers with complex tax situations, the consequences of an SFR can be even more severe, potentially leading to higher tax liabilities, penalties, and even passport revocation. Here’s what you need to know to avoid an IRS Substitute for Return and minimize financial risks.
What is a Substitute for Return (SFR)?
A Substitute for Return (SFR) is a tax return the IRS files on behalf of taxpayers who fail to submit their own. The IRS gathers information from third-party sources such as W-2s, 1099s, and other reported income statements, but the return won’t account for:
- Itemized deductions (e.g., mortgage interest, medical expenses)
- Tax credits (e.g., Child Tax Credit, Foreign Tax Credit)
- Filing status considerations that could lower tax liability
Since the IRS only includes income without accounting for these tax-saving opportunities, an SFR almost always results in a higher tax bill.
Why the IRS Files a Substitute for Return
If the IRS identifies that you haven’t filed a required return, they will attempt to reach you with notices. If you ignore these notices, they will proceed with the SFR process, which includes:
- Notice of Deficiency (CP3219N): This informs you that the IRS has created a tax return on your behalf.
- 90-Day Response Window: You have 90 days to file your own return or petition the Tax Court.
- Finalized Tax Assessment: If you don’t take action, the IRS finalizes the assessment, and the unpaid balance becomes legally enforceable.
Ignoring an SFR can lead to aggressive collection actions by the IRS.
Consequences of an IRS Substitute for Return
If you let the IRS file an SFR, you’ll likely face several negative consequences, including:
1. Higher Tax Liability
The IRS doesn’t factor in deductions or credits, leading to a larger-than-necessary tax bill. For expats, this means missing out on benefits like:
- Foreign Earned Income Exclusion (FEIE)
- Foreign Tax Credit (FTC)
- Deductions for housing and foreign business expenses
Without these, expats may owe thousands more in taxes than they should.
2. Failure-to-File and Failure-to-Pay Penalties
Not filing leads to a failure-to-file penalty, which is 5% of the unpaid tax per month, up to 25% of your total tax bill. If you owe taxes but don’t pay, you’ll also incur a failure-to-pay penalty of 0.5% per month.
Example:
If you owe $10,000, penalties can quickly add up to over $2,500 in just a few months.
3. IRS Collection Actions
Once the SFR tax bill becomes official, the IRS can legally enforce collections, which may include:
- Wage garnishment – The IRS can take a portion of your paycheck.
- Bank levies – Your bank account could be frozen and funds withdrawn.
- Federal tax liens – The IRS can place a legal claim on your property.
4. Risk of Passport Revocation
If your total tax debt exceeds $62,000 (as of 2025), the IRS can notify the State Department, leading to passport denial or revocation. This is particularly concerning for expats who rely on their passports for travel and residency.
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How to Avoid an IRS Substitute for Return
If you’ve missed a tax filing deadline, take action now to prevent an SFR from impacting your finances.
1. File Your Own Tax Return ASAP
Even if the IRS has already filed an SFR, you can submit your own return to override it. This allows you to:
- Claim deductions and credits
- Reduce your tax liability
- Correct any errors made by the IRS
2. Respond to IRS Notices Promptly
If you receive a CP3219N Notice of Deficiency, you have 90 days to either:
- File your own tax return to replace the SFR.
- Dispute the IRS’s assessment by petitioning the Tax Court.
Ignoring this notice means the IRS will finalize the SFR, and you’ll lose your chance to adjust your tax liability.
3. Set Up a Payment Plan if You Owe
If you owe taxes but can’t pay in full, consider an IRS payment plan such as:
- Installment Agreement – Allows you to pay in monthly installments.
- Offer in Compromise (OIC) – A settlement option for taxpayers in financial hardship.
4. Seek Professional Tax Assistance
If you’re dealing with an SFR or have unfiled tax returns, a tax professional specializing in expat taxes like Greenback Expat Tax Services can help:
- Prepare and file past-due returns
- Negotiate with the IRS
- Reduce penalties and tax liability
FAQs About IRS Substitute for Return
Can I still file my own tax return after an SFR is filed?
Yes. You can file your own return at any time, and the IRS will typically accept it and adjust your tax liability accordingly.
What happens if I ignore an SFR?
The IRS will finalize the return, and the tax amount will become legally enforceable. This can lead to collection actions, penalties, and potential passport revocation.
Do expats get special considerations with an SFR?
No. The IRS does not automatically apply for expat tax benefits like the Foreign Earned Income Exclusion or Foreign Tax Credit, which can result in a much higher tax bill.
How can I prevent an SFR from being filed?
The best way to avoid an SFR is to file your tax return on time, even if you don’t owe taxes. Expats can request an extension until October 15 but should still file before that deadline.
Have Questions? Greenback Can Help!
An IRS Substitute for Return (SFR) can be costly, especially for expats and taxpayers with complex financial situations. Without deductions or credits, you could end up paying significantly more in taxes than necessary.
To avoid the financial pitfalls of an SFR:
- File your tax return on time.
- Respond to IRS notices immediately.
- Seek professional help if you have unfiled returns.
At Greenback Expat Tax Services, we specialize in helping expats stay compliant while minimizing tax liability. If you need help filing back taxes or responding to an SFR, Contact us, and one of our Customer Champions will happily address all your concerns.
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