Before You Resolve a Tax Balance, Find Out Who Calculated It
A trucker sat across from me holding an IRS notice that said he owed more than his truck had earned him in profit that year, and he wanted to know how many years it would take to pay it off.
He drove for a handful of freight companies, and they paid him on 1099s. In 2022, he didn't file a return. Then the letters started coming, and he put them on top of the refrigerator.
Eventually, a bill came.
The balance on that notice was far larger than he ever imagined, but he was delinquent on filing, and he figured he owed interest and penalties, so he wanted to know how to resolve it.
That's a problem because he never actually filed a return.
The IRS filed it for him.
Plenty of people in his position walk straight into a payment plan or an Offer in Compromise on that exact number and spend years paying down money they never really owed.
Here are four things every professional should know about balances the IRS calculates on its own.
1. The IRS Prepared His Return, and It Was Prepared to Come Out High
When someone doesn’t file, the IRS files a return for them. It’s called a Substitute for Return, or SFR, and it’s built from whatever income third parties reported under the taxpayer's Social Security number.
For a self-employed person, that means gross income receipts. But here's the catch. There are no business expenses included. The freight companies reported what they paid him, and nobody reported what he spent.
The SFR files the client as single with no dependents and skips the Qualified Business Income deduction. Self-employment tax gets calculated on the full gross amount, so the client pays Social Security and Medicare tax on money that went straight into everyday business expenses.
The SFR is the IRS filling out the return with the least favorable assumptions available.
Here’s an illustration (an example, not the trucker’s actual numbers). A driver is paid $180,000 in 2023 and spends $140,000 running the truck, leaving $40,000 in real profit.
The SFR version: roughly $55,000 in tax, approaching $85,000 with penalties and about 2.5 years of interest.
His real return: roughly $7,700 in tax, and around $12,000 with penalties and interest.
The gap size depends on the client’s expenses. An SFR for a W-2 employee may be close to accurate, while an SFR for a trucker, contractor, or rideshare driver can be several times what they actually owe.
2. How to Tell an SFR Balance on a Transcript
Your client won’t tell you it’s an SFR, because your client doesn’t know. Clients describe every bill the IRS calculated as “an audit.”
The account transcript will tell you in about two minutes whether it's an SFR. Here’s what to look for:
The TC 150 line. On a filed return, it shows a received date and the tax the client reported. On an SFR, it reads “Substitute tax return prepared by IRS” with $0.00.
What follows it. A large assessment (TC 290 or TC 300) on top of that $0.00 return, followed by failure-to-file and failure-to-pay penalties (TC 166 and TC 276).
The look-alikes. A CP2000 correspondence audit adjustment sits on a filed return and usually carries a TC 922. An audit carries TC 420 and TC 421. Only the SFR has no real return underneath it.
The cross-check. If the SFR income matches the wage and income transcript to the dollar, the IRS used third-party data and nothing else.
The mail. A CP2566 or a Letter 3219 may point to an SFR.
3. The Fix Is an Original Return, Not Audit Reconsideration
Once you know it’s an SFR, the fix is simpler than most people expect. You prepare and file the client’s actual return, with every expense, deduction, and credit they’re entitled to, and it replaces the return the IRS wrote.
Audit reconsideration is the wrong tool here. That's for assessments that came out of an actual examination, and an SFR wasn't that.
The original return still takes the place of the SFR even after the deadline on the notice of deficiency has passed.
Processing time varies, so it’s worth asking for a collection hold while the return works its way through.
Once the trucker’s real return posted, with the fuel, the insurance, and the truck payments, the balance dropped to a fraction of what the notice showed.
4. Fix the Number Before You Resolve It
Every payment plan and every Offer in Compromise is calculated against the balance on the account. If the balance is wrong, every resolution built on top of it is wrong too.
Resolving an SFR balance commits your client to paying for income they never kept, and once a resolution is in place, very few people go back and question the number underneath it.
In the illustration, one version of that driver spends years on a payment plan against $85,000, while the other works out a plan against $12,000.
Your client will want it handled now, because the letters are frightening. Filing the original takes some time, but it is always cheaper than spending years paying on the wrong number.
TL;DR
⏩ When someone doesn’t file, the IRS files a Substitute for Return (SFR) using only third-party income data.
⏩ For self-employed clients, the SFR ignores business expenses and taxes self-employment income on the gross, so the balance may be several times what they owe.
⏩ On the transcript, an SFR shows a TC 150 reading “Substitute tax return prepared by IRS” with $0.00, followed by a large assessment and penalties.
⏩ The fix is an original return, not audit reconsideration, and it works even after the notice-of-deficiency deadline.
⏩ Fix the number before anyone negotiates over it.
The trucker came in asking how to pay a bill. The question that actually changed his outcome was who calculated it.
BTW, I get the same three questions from CPAs and attorneys every time they have a client with tax debt. I finally wrote the answers down.
Want to understand your options before you call anyone?
Download my free book — Freedom From Tax Debt — a plain-language guide to how the IRS collections process actually works and what resolution really looks like.
➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.
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Email: s.weisberg@weisberg.tax
Phone/Text: (248) 971-0885
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