How the IRS builds a substitute return
When a return is missing, the IRS uses the income reported to it for that year: wages from W-2s, freelance and gig payments from 1099s, interest, dividends, retirement distributions and more. It calculates the tax, adds penalties and interest, and proposes the result to you, often through a CP2566 or a Notice of Deficiency, CP3219N.
Why it usually overstates what you owe
A substitute return may not include:
- Business expenses that reduce self-employment income
- Dependents and the credits that come with them
- The filing status that fits you, such as head of household or married filing jointly
- Deductions and credits you’d claim on your own return
- The cost basis of investments you sold, so sale proceeds can be taxed as if they were all profit
For someone with 1099 income and real expenses, the difference can be large.
How to replace it
- Get the IRS’s records for the year, including the wage and income transcript the IRS used.
- Prepare your own complete return, including everything the IRS left out.
- Respond to the notice you received, by its deadline. For a CP3219N, you have 90 days from the notice date to petition the Tax Court, and filing a return doesn’t extend that deadline.
- Send the return to the address on your notice.
The IRS will generally adjust your account to the correct figures once it processes your return.
Where we come in
Replacing substitute returns is a big part of catch-up filing, especially for self-employed people. We pull the IRS’s figures, rebuild what’s missing, and a licensed preparer signs each return. See catch-up filing.