Substitute for Return (SFR)
An SFR is a tax return prepared by the Internal Revenue Service (IRS) when a taxpayer fails to file their own tax return. The IRS uses information from third parties, such as employers and banks, to estimate the taxpayer’s income and calculate the tax owed. This estimate is often less favorable to the taxpayer, as it may not take into account deductions, credits, or other tax benefits the taxpayer is eligible for.
For example, if an individual does not file their tax return for a given year, the IRS may create an SFR based on the W-2 forms submitted by the individual’s employer. The taxpayer then faces the potential of owing a larger tax bill than if they had filed their return accurately, as the SFR process does not consider deductible expenses that might reduce their taxable income. Therefore, it is advisable for taxpayers to file their returns on time to avoid the potential pitfalls of an SFR.
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