I Didn't File, but I Got Assessed Anyway -- Why?

From time to time even the best-intentioned tax payer can neglect to file an income tax return. When that happens, the IRS will often file a return on that tax payer's behalf -- it's called a Substitute for Return (SFR). And it's no favor.

Let's look at an example. Suppose Joe Smith failed to file his 2005 tax return. What happens? Typically, the IRS will file a return on Joe's behalf within 2.5 years (courtesy the Automated Substitute for Return System). The IRS calculates Joe's taxes by assessing his gross income for 2005, without regard to any specific deductions or exemptions for which he might qualify. The result is that Joe is assessed a tax much higher than he might have had if he prepared and filed the tax himself. Joe won't know about this until he receives a demand letter from the IRS.

The best solution, of course, is for a tax payer to prepare and file tax returns in a timely manner. But even where the IRS has filed a SFR, it's in the tax payer's best interest to file. By papering the SFR, a tax payer can take full advantage of the deductions and exemptions to which he is entitled, even if he's filing his return long after the return was actually due.

If you've received an assessment for a year you haven't filed, there's still time to make things right. Consult a tax professional and paper over the SFR.