How the IRS Determines Unfiled Returns

How the IRS identifies non-filers

The IRS doesn't simply wait for you to file. Through systematic information matching, the IRS actively identifies taxpayers who received income but didn't file a return. This process is largely automated and comprehensive.

The IRS receives income information before you file. Employers, banks, investment companies, and other payers are required to report payments to both you and the IRS. This creates a record of your income in IRS systems—whether or not you file a return.

When filing season ends and no return appears under your Social Security Number, the IRS identifies a potential non-filer. This triggers a sequence of notices and, if no response occurs, the IRS takes action to create a return on your behalf.

The information matching process

The IRS Information Returns Processing (IRP) system matches income reported by third parties against filed returns. This includes:

• W-2 forms: Wages, salaries, and tips reported by employers
• 1099-NEC: Non-employee compensation (freelance, contractor income)
• 1099-MISC: Miscellaneous income (rents, royalties, prizes)
• 1099-INT: Interest income from banks and financial institutions
• 1099-DIV: Dividend income from investments
• 1099-B: Proceeds from broker and barter transactions
• 1099-G: Government payments including unemployment
• 1099-R: Retirement distributions
• K-1 forms: Income from partnerships, S corporations, trusts

Every document with your SSN creates a record in IRS systems. If the sum of reported income exceeds filing thresholds and no return is filed, the IRS flags your account for non-filer action.

What triggers IRS action

IRS action on unfiled returns is triggered when:

• Income reported under your SSN exceeds the filing threshold for your status
• No return is filed by the due date (or extended due date)
• Initial notices go unanswered
• The non-filing pattern continues across multiple years

The IRS prioritizes cases based on the amount of unreported income, the number of years unfiled, and available enforcement resources. High-income non-filers are addressed more quickly, but the IRS eventually addresses all identified non-filers.

Important: Even if you haven't received a notice, the IRS may have identified you as a non-filer. Processing backlogs, address changes, and resource limitations can delay notices—but they don't prevent eventual action.

The Substitute for Return process

When a taxpayer fails to file after receiving notices, the IRS exercises its authority under IRC Section 6020(b) to prepare a Substitute for Return (SFR).

The SFR process:

1. Income identification: IRS compiles all income reported under your SSN
2. Return preparation: IRS prepares a return using this income data
3. Filing status assigned: Single or Married Filing Separately (whichever is least favorable)
4. Standard deduction only: No itemized deductions, credits, or other benefits
5. Tax calculated: Based on income minus standard deduction
6. Notice of Deficiency: You're notified of the proposed assessment
7. Assessment: If no response, the tax becomes legally assessed

The SFR is designed to be unfavorable. The IRS cannot know what deductions, credits, or filing status you're entitled to without your input. The SFR represents the IRS's calculation based solely on reported income and minimum allowances.

How SFR tax is calculated

The SFR calculation is intentionally conservative (in the IRS's favor):

• All reported income is included: W-2s, 1099s, K-1s—everything in IRS systems
• Filing status: Single or Married Filing Separately (never Head of Household, even if you qualify)
• Deductions: Standard deduction only (no itemized deductions even if you have them)
• Credits: No credits applied (no Child Tax Credit, Earned Income Credit, education credits, etc.)
• Exemptions: No dependent exemptions
• Business expenses: No business deductions for self-employment income

Example: A self-employed taxpayer with $80,000 gross income and $30,000 in legitimate business expenses would have an SFR based on $80,000 income—the IRS doesn't know about the expenses.

Penalties and interest are added to the SFR assessment:

• Failure to file penalty: 5% per month, up to 25%
• Failure to pay penalty: 0.5% per month
• Interest: Compounded daily from the original due date

Notice sequence for unfiled returns

Before filing an SFR, the IRS sends a series of notices:

CP59 — Initial Non-Filer Notice

First notice indicating the IRS has no record of your return for a specific year. Requests that you file or explain why you didn't need to file.

CP515 / CP516 — Follow-Up Notices

Reminder notices if you don't respond to CP59. Increasingly urgent language about consequences of continued non-filing.

CP518 — Final Notice Before SFR

Final warning that the IRS will file a return for you if you don't respond. This is your last opportunity to file before the IRS takes action.

Notice of Deficiency (90-Day Letter)

After the IRS prepares the SFR, you receive a statutory Notice of Deficiency. This gives you 90 days to file a petition in Tax Court if you disagree. If you don't respond, the assessment becomes final.

Consequences of IRS-filed returns

Once the IRS assesses tax based on an SFR:

• The assessment is legally binding until you file your own return
• Collection actions proceed: Notices, liens, levies, wage garnishment
• The balance includes penalties and interest from the original due date
• The statute of limitations for collection begins (10 years from assessment)
• Federal tax lien may be filed, damaging credit and affecting property sales
• Refund claims are limited: You generally cannot claim a refund for SFR years after three years from the original due date

Responding to an SFR

If the IRS has filed an SFR for you, you have options:

Before assessment (during 90-day period)

File your own return. If the IRS receives your return before the deficiency is assessed, they'll process your return instead of the SFR.

After assessment

File your own return and request audit reconsideration. The IRS will review your return and adjust the assessment to reflect your actual tax liability. This typically results in a lower balance—often significantly lower.

Tax Court petition

If you disagree with the SFR calculation, you can petition Tax Court within 90 days of the Notice of Deficiency. This prevents assessment while the case is pending.

Filing your own return after SFR

You should almost always file your own return after an SFR. The SFR calculation is designed to be unfavorable, and your actual return will typically show lower liability.

When you file your own return:

• You can claim the correct filing status
• You can itemize deductions if beneficial
• You can claim all applicable credits
• You can deduct business expenses from self-employment income
• You can claim dependents and related benefits

The IRS will recalculate your liability based on your filed return. If your return shows lower tax than the SFR, the assessment will be reduced. Penalties and interest will be recalculated based on the corrected liability.