When a taxpayer has sufficient income to have a filing requirement but fails to file a tax return, the IRS or another taxing agency (such as a state) may file a tax return on the taxpayer’s behalf. These government-filed returns are often not in the taxpayer’s best interest because they exclude several potentially helpful exemptions, deductions, or credits. A tax return that is filed for the purposes of replacing a government-filed return is called a reconsideration return.
A return filed by the IRS on behalf of a taxpayer is called a “substitute for return,” or SFR for short. With most state agencies, however, these are referred to as “assessed tax returns.” An SFR is based upon information available to the taxing agency through reporting requirements. As a result of reporting requirements, the IRS is typically aware of all wages, profits, and other income sources paid to a taxpayer in any given tax year. If such income is sufficient to cause a filing requirement but a return is not filed, the taxing agency may then issue its SFR.
While an SFR will include all wages and then determine an appropriate tax rate, there may be many reasons why a taxpayer is better off filing a reconsideration return than accepting the return prepared by the IRS. Some of the most common reasons include married filing jointly, claiming dependents such as children or parents, deducting allowable business expenses, itemized deductions, claiming refundable tax credits such as the Earned Income Credit or Child Tax Credit, or claiming the basis in assets sold such as stock or property.
Filing a reconsideration return is different in some respects than filing an original tax return. At the IRS, reconsideration returns are processed differently than other tax returns. They often need to be filed with a special unit that specializes in reconsideration returns. Filing a reconsideration tax return to the wrong address at the IRS may be equivalent to filing the return into the recycling bin.
Reconsideration returns often take much longer to process than original tax returns. The IRS may take as long as six months to complete the processing of a reconsideration return. During this time, the taxpayer remains liable for any balance owed as a result of the Substitute for Return, including any accumulated penalties and interest. Once a reconsideration return is accepted and processed, the IRS will adjust the balance owed on a taxpayer’s account, along with adjusted levels of penalties and interest. Any money overpaid as a result of the lowered balance can be refunded or used to offset other tax liabilities.
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