IRS SUBSTITUTE RETURNS
When a taxpayer fails to file their own tax returns, the IRS has the authority under Section 6020(b) of the Internal Revenue Code to prepare a tax return on behalf of the taxpayer. The IRS can base its computations on documents received from payers (like W-2 forms, 1099s, etc) as well as using industry standards and other sources. These returns – referred to as “Substitute Returns” – generally reflect more tax than is actually due. That is because the IRS will not give the taxpayer credit for deductions or exemptions that the taxpayer may have claimed on their own prepared return. Generally, it is to the taxpayer’s advantage to prepare their original (albeit delinquent) return after the IRS has prepared its own return.
The other consideration for married taxpayers is that the IRS never prepares Substitute Joint Returns. Filing jointly is an election that can only be made by the husband and wife. Often by filing a joint return (and getting the benefits of joint filing rates and credits only available to married taxpayers if they file jointly – like child care), the taxpayer will reduce their liability.
There are restrictions on filing a delinquent joint return, however. If either spouse had previously filed a separate return, the election to file jointly has to be made within 3 years of the original due date (without extension). If neither spouse filed their own return, then the joint return election can be made at any time regardless if the IRS prepared a substitute return.
Here is a link to a Chief Counsel Memorandum that provides a good discussion of the IRS’s substitute return program, and the opportunities taxpayers have to replace the IRS prepared return with their own.