Statutes of Limitations and the Substitute for Return Procedures

0 Flares 0 Flares ×

We have written quite a few blog posts on the substitute for return (SFR) process but not one specifically addressing the statute of limitations regarding the returns prepared using this process.  Guest blogger Michelle Drumbl wrote about the procedures involved in preparing these returns. Guest blogger Jeffrey Sklarz wrote a post on the interaction between IRC 6020(b) and deficiency assessments.  I wrote about the IRS suspending the SFR program when it was over burdened in 2017 (imagine what’s happening to the program post pandemic.)  We have written many posts about the impact of failure to file a return on bankruptcy discharge and the impact of an SFR in bankruptcy.  One sample from these posts is linked here.

This post focuses on what happens with respect to the statute of limitations on assessment and collection when the IRS makes a substitute for return assessment.


Just to back up slightly before answering those questions in order to make sure everyone understands what we are talking about, it is necessary to quickly cover what makes an SFR an SFR.  Typically, the case starts with the IRS receiving information returns which suggest that a taxpayer has a return filing obligation and a tax liability, but the IRS can find no return on its system.  It then sends the taxpayer a letter requesting information from the taxpayer on the information returns, asking if the taxpayer has filed, asking if the taxpayer would like to file now if he or she has not previously filed, and asking if the taxpayer agrees to the liability the IRS has computed based on the information returns.  Upon receipt of that letter, and not having previously filed a return for the period at issue, the taxpayer typically does nothing.  There are variations on the theme, but continued inactivity and procrastination usually underlie the reaction to this letter. 

After the requisite amount of time, the IRS eventually sends a notice of deficiency.  It needs to do this because, lacking the taxpayer’s explicit consent to assess, the IRS needs statutory consent to assess which it will get with the notice of deficiency process.  Since only about 3% of persons receiving a notice of deficiency petition the Tax Court, it’s safe to say that the vast majority of taxpayers receiving the notice of deficiency, which has computed the taxpayer’s liability based on third party returns, do not petition the Tax Court, allowing the IRS to assess the proposed liability because of the default.  Based on these facts, we look at the statutes of limitation. 


When someone does not file a return, the statute of limitations on assessment does not run.  The fact that the IRS goes through the SFR procedures and makes an assessment based on the information reported to it from third parties does not count as the filing of a return by the taxpayer and does not start the clock ticking on the time the IRS has to make an assessment. IRM  If the IRS decided that it did not assess the proper amount as a result of the SFR, it could assess an additional amount at any time.  Because the taxpayer did not submit a return stating the correct amount of the liability under penalty of perjury, the determination by the IRS in the SFR is imperfect.  Usually, an SFR overstates a taxpayer’s liability, but that outcome does not hold true if the taxpayer has income not reported to the IRS on a third-party information return.  For that reason, the IRS should continue to have the right to assess indefinitely.

If the taxpayer files a petition in Tax Court in response to the notice of deficiency setting forth the proposed liability stemming from an SFR, the Tax Court case will close out the tax year and the statute of limitations will no longer be meaningful.  Even though the taxpayer has never filed a return under penalty of perjury, the finality afforded by a Tax Court decision ends the ability of either the IRS or the taxpayer to seek a change in the liability after the conclusion of the Tax Court case.

There is some dissonance in the way I describe the effect of an SFR on the taxpayer’s ability to start the clock running on assessment and the way bankruptcy courts have viewed the subsequent filing of a tax return after an SFR assessment.  If the IRS issues an SFR notice of deficiency and the taxpayer does not petition the Tax Court (the 97% likelihood), and if the taxpayer subsequently files a Form 1040 under penalty of perjury, most bankruptcy courts say that the filing of the Form 1040 in those circumstances does not start the two-year period for achieving discharge set forth in B.C. 523(a)(1)(B)(ii) because the filing of the Form 1040 at that point is not the filing of a return.  The IRS has successfully pushed this argument over the past two decades following the decision in Hindenlang

Even though the filing of a Form 1040 signed under penalties of perjury does not start the two-year period for achieving discharge, it should start the three-year statute of limitations on assessment. This conclusion is bolstered by IRM, which states that when a taxpayer files a signed tax return after the Service has processed an unsigned SFR, the assessment statute period will begin with the received date of the taxpayer’s signed return. The IRS has not obtained an opinion that the filing of a return after an SFR assessment is the same as the filing of a good return after a fraudulent return, which the Supreme Court decided in Badaracco does not start the period of limitations.  I am not aware that the IRS has ever argued that the same rationale in Badaracco applies to the SFR situation, and with the language from IRM, I’m not sure they ever would make this argument.  So, the filing of a Form 1040 signed under penalties of perjury starts the statute of limitations on assessment even if it will not, under most case law in the bankruptcy courts, start the running of the discharge clock. IRM also supports this conclusion.


The making of an assessment based on an SFR starts the running of the 10-year period for collection of the liability.  IRM The starting of the clock on the collection period for this SFR-based assessment does not mean that the IRS cannot make another assessment at a later point.  It just means that the fact that the assessment statute of limitations remains open does not mean that the collection statute on the SFR is open ended.  During the course of any one tax year the IRS might make numerous assessments.  While doing so is not normal, it is possible.  Each time the IRS makes an assessment, the statute of limitation on collection starts running with respect to that assessment creating the possibility of several statutory ending dates for one period.


  1. Don’t IRM and contradict each other as regarding whether a SFR triggers the 10-year collection period?

  2. For bankruptcy discharge purposes, if you have a tax year with an SFR designation, you need to learn whether the taxpayer filed a return before or after the tax assessment. As Keith indicates, if the return were filed after the assessment, the tax will be nondischargeable. (I’m aware of only one case where, after all appeals concluded, the tax on the return filed after the SFR assessment was found to be dischargeable.) The IRS still allows the tax on a late-filed return to be dischargeable, assuming the two-year rule is met, if the return were filed before the assessment at issue.

    All of that and Keith’s post leads to this practice tip. Ask the tax practitioner hotline for the ASED and subtract three years. If that date is before the assessment, the tax is potentially dischargeable. If the date is after the assessment the tax is overwhelmingly likely to be nondischargeable. If there is no ASED, then there is very strong evidence that the taxpayer did not file a return.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind