How to Handle a Notice of Substitute Return Filing

substitute return notice

Letter 2566, Notice of Proposed Tax Assessment

The first notice you’ll receive about a Substitute for Return (SFR) is typically a Letter 2566, Notice of Proposed Tax Assessment. When you receive this notice, the IRS is telling you, “You were supposed to file a tax return but didn’t, and here’s how much we think you owe us.”

The proposed assessment is usually higher than it should be because the IRS doesn’t have all the information it needs to file your taxes. They may have a single W-2, but they could be missing your mortgage interest payments, charitable contributions, dependents you can claim, and other deductions and credits you’re entitled to.

This notice will give you 30 days to file a return voluntarily. You should do everything you can to file a return during that period to take advantage of all of your credits, exemptions, and deductions.

The Second Notice

If you don’t file within 30 days, you’ll receive a Notice of Deficiency. This is known as the 90-day letter because it gives you 90 days to petition Tax Court.

Once again, your best response is to file a tax return. If you can’t pay your taxes, you may be able to request an installment agreement, but you still need to file your return.

If you just didn’t realize you needed to file, then simply file the return and pay your taxes. You may want to consider requesting penalty abatement to reduce the amount you owe.

If you need to work out a payment arrangement, contact a tax attorney to figure out the best option for your financial situation.

Adjusting the Substitute Return

Even if the IRS files the SFR, you should still consider filing a tax return if it will result in a lower tax liability. The IRS will generally adjust your account to reflect the actual filed return.

If you don’t do anything, you may have your tax refunds seized in all future tax years until your tax debt is paid off. The IRS may also file a Notice of Federal Tax Lien on your property, and you could have a portion of your wages or bank account funds seized as well.

File your tax return before the IRS files an SFR for you,and contact a tax attorney to discuss your tax debt resolution options.

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Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.