If you stopped filing, the IRS did not stop counting. Eventually it builds a return for you from W-2s, 1099s and whatever else it has on file. That is a substitute for return, usually called an SFR.
An SFR year is one of the hardest tax debts to get rid of in bankruptcy. Here is why, and what you can still do about it.
What an SFR is
IRC § 6020(b) says that if a person fails to make a required return, the IRS "shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise." The IRS treats that return as "prima facie good and sufficient for all legal purposes."
The process usually runs like this. The IRS prepares the SFR, often with no deductions or credits you would have claimed, and sends a notice of deficiency under IRC § 6212. You have 90 days to petition the Tax Court under IRC § 6213(a). If you do nothing, the IRS assesses the tax, plus penalties and interest.
The SFR also counts for the IRS on penalties. Under IRC § 6651(g), an SFR is treated as your return for figuring the failure-to-pay penalty, but disregarded when figuring the failure-to-file penalty. Heads, the IRS wins. Tails, you lose.
Why an SFR blocks discharge
The Bankruptcy Code does not discharge a tax "with respect to which a return ... was not filed." 11 U.S.C. § 523(a)(1)(B)(i). Since 2005, the hanging paragraph at the end of § 523(a) has spelled out that a "return" includes one prepared under IRC § 6020(a), with your cooperation and signature, "but does not include a return made pursuant to section 6020(b)."
So an SFR year, standing alone, is a year where no return was filed. The three-year rule does not help. The 240-day rule does not help. Age does not help.
And because no return was filed, the IRS is not under the usual three-year assessment deadline either. IRC § 6501(c)(3) says that when no return is filed, the tax may be assessed "at any time."
6020(a) versus 6020(b)
The difference between these two subsections can decide your case.
- § 6020(a): you fail to file, but you "consent to disclose all information necessary" and the IRS prepares the return, which you then sign. The hanging paragraph says this counts as a return.
- § 6020(b): the IRS makes the return on its own. This does not count.
Look at your transcript and the assessment file, not your memory of a phone call. The IRS manual describes how its own staff try to tell an agreed SFR from a return actually received, and it is not always obvious from the face of the account.
What if you file your own return after the SFR?
This is the question I get most. The answer depends on who is asking and where you live.
The IRS position
According to IRM 5.9.17.8.1, the IRS litigating position (Chief Counsel Notice CC-2010-016) is that when you file a Form 1040 after an SFR assessment, only the portion of the tax that was not previously assessed can be discharged. If your return reports no additional tax, or less tax than the SFR, the IRS position is that no portion is dischargeable. A single year can end up split: part dischargeable, part not.
Florida and the Eleventh Circuit
In In re Justice, 817 F.3d 738 (11th Cir. 2016), the taxpayer did not file for several years. The IRS prepared SFRs, sent notices of deficiency, and assessed the tax. More than a year later he filed his own Forms 1040, years late, with no explanation for the delay. The court held those filings were not an honest and reasonable attempt to comply with the tax law under the Beard test, so they were not returns, and the taxes were not dischargeable. The court did not decide whether the IRS's alternative approach is correct, under which a return filed after assessment is not a return for the tax already assessed but may be a return for any additional tax it reports.
Other courts
The Tenth Circuit in In re Mallo, 774 F.3d 1313 (10th Cir. 2014), and the Third Circuit in In re Giacchi, 856 F.3d 244 (3d Cir. 2017), both held that Forms 1040 filed after an IRS assessment were not returns. The Eighth Circuit in In re Colsen, 446 F.3d 836 (8th Cir. 2006), went the other way under pre-2005 law and looks at the form itself. The IRS manual follows Colsen for courts in the Eighth Circuit: if the debtor files a return that on its face evinces an honest and reasonable attempt to satisfy the tax laws more than 2 years before the petition date, “the entire liability (including the SFR assessment) is discharged” (IRM 5.9.17.8.1(3), rev. 09-10-2024). Florida is not in the Eighth Circuit. For the full split, see are late-filed tax returns dischargeable?
Should you still file your own return?
Yes, in most cases, and not only for bankruptcy reasons.
- It can lower the bill. SFRs often overstate tax because the IRS does not know your deductions, credits, or basis. In Justice, the IRS reviewed his late Forms 1040 and abated part of the tax it had assessed. A smaller debt is a smaller problem, discharge or not.
- It may report additional tax. Under the IRS's own position, additional tax reported on your return beyond the SFR can be dischargeable once the timing rules are satisfied.
- Chapter 13 requires it. A Chapter 13 case has its own requirements for filing recent returns. See unfiled returns and Chapter 13.
- Nothing else works without it. Payment plans, offers, and most other IRS options start with filed returns.
The best move is to file before the IRS builds an SFR at all. If you are still in the stage of letters asking for a missing return, you have a better chance than someone who waits for the assessment. Start with what to do when you haven't filed in years, and our firm's page on unfiled tax returns.
If bankruptcy cannot reach the SFR year
That does not mean bankruptcy is useless. Other years may still be dischargeable, which can free up money to deal with the SFR year. In Chapter 13, you can pay the IRS through a plan while the automatic stay stops levies, although taxes on unfiled-return years are still excluded from the Chapter 13 discharge under 11 U.S.C. § 1328(a)(2). Run each year through the discharge calculator to see which ones are even in play.
If the IRS filed returns for you and you want to know what bankruptcy can and cannot do about those years, call me at (813) 229-7100. Every case turns on its own transcripts and dates; this page is general information, not legal advice for your situation.