The Phantom Tax Bill That Can Destroy Your Client's Finances
There will come a time when your client comes to you owing tens of thousands of dollars to the IRS on a return they never filed, based on adjusted gross income beyond what they've ever made in a single year in their life.
Welcome to the IRS Substitute for Return (SFR).
Intro
When you don't file a tax return, the IRS does it for you.
They'll create a tax return using income documents they've received without using deductions, expenses, or life circumstances.
Now your client has "phantom tax debt": a number fabricated by the IRS but which becomes very real when the IRS starts enforcing collections.
Understanding the SFR
➲ Here are the three things about Substitute for Returns you need to know:
How the IRS creates the SFR?
What’s missing from an SFR (everything that's helpful)?
How to ensure the actual taxes owed take the place of the phantom number?
1. How the IRS Creates Phantom Debt With an SFR?
The IRS doesn’t wait around when someone fails to file.
➧ No questions.
➧ No calls.
➧ No nuance.
It's up to the taxpayer to file.
When they don't, the IRS does it for them with whatever they have, including W-2s, 1099s, and brokerage statements—and churns out a return.
The result is a real tax bill with the taxpayer's income taxed at the highest rates without taking into account deductions, credits, or anything else that would bring the balance down if they had prepared it on their own.
Your client might have made $120,000 in gross income, but if $90,000 of that went to deductible business expenses, the IRS doesn’t know and doesn’t care.
To the IRS, it all counts as taxable because your client didn't file a return themselves.
2. What’s Missing from an SFR (Everything That Helps)?
A Substitute for Return skips every part of the tax code that could help your client.
➲ Your client gets none of the following:
Standard deductions
Itemized deductions
Business expenses
Education and child tax credits
Capital loss carryforwards
Retirement contributions
The return created by the IRS is all take, no give. It assumes your client had no dependents, no expenses, no write-offs, and no breaks.
This isn’t a reflection of their financial year.
It’s a caricature of it designed to drive compliance by creating pressure.
And it works.
3. How to Stop It: Replace the SFR With an Original Return
Once the IRS files an SFR, the system moves forward like the phantom debt represents reality.
➧ Collections begin.
➧ Liens are filed.
➧ Bank accounts are levied.
The only way to stop it is to file the actual return.
That means gathering all the appropriate documents, preparing a complete and accurate return, and submitting it to the IRS to replace the IRS's version.
When you do it right, the IRS will adjust the account but it takes time to process.
The phantom liability gets replaced by a factual one.
And in most cases, that new number is far smaller—sometimes shockingly so.
But the longer your client waits, the harder it gets.
And IRS collections don't slow down just because your client is scrambling to catch up.
TL;DR
⏩ The IRS creates SFRs when clients don’t file—using only income data.
⏩ Those SFRs leave out deductions, credits, and essential context.
⏩ The result is phantom debt: inflated, and enforceable.
⏩ The only fix is to file an original return to replace the Substitute for Return.
⏩ Delay turns a bad situation into a disaster as collections move forward as if the number on the SFR represents reality.
Let's Talk...
➤ Have you ever had a client where the IRS filed a Substitute for Return?
