When the filing deadline for income tax returns comes and goes in mid April, the Internal Revenue Service starts their sorting. The agency works hard to double check whether or not a taxpayer has completed their April duty. The technilogical benefits that computers provide make this job a lot easier and ensure that it gets completed a lot faster.
When the IRS determines that a taxpayer has not filed their return for the year, the notice process is begun. First, the taxpayer is sent a letter in which the IRS lets the individual know that the agency has not received a tax return for the year. The letter puts the individual on notice and gives them the opportunity to submit a return. In some cases, the IRS may give the taxpayer a couple extra tax notices before further action is taken.
When one or more notices go unanswered, the IRS begins take more affirmative actions. First is a Substitute for Return. This is a tax return that the IRS prepares for the taxpayer, but it does not have the same benefits that a taxpayer-filed return has. For instance, no deductions are taken and every penny of income that the IRS is aware of is taken into account.
An SFR is not final. A taxpayer still has some options at this point. They can still complete their own income tax return or the taxpayer can simply pay what the IRS says they owe in the SFR. Failing to respond to the SFR is when penalties really begin. At this point, the IRS may take action such as accessing the funds in a bank account, garnishing wages or placing a lien on a piece of property.
Whether it is the first notice or the final notice, those who find themselves in this situation should seek the assistance of an attorney. The attorney can work with the IRS to negotiate an installment agreement, offer in compromise or other solution for the tax liability.
Source: Market Watch, "What if you never file your tax return?" Eva Rosenberg, May 21, 2013