Substitute for Return Assessments and Bank Levies: Filing Your Way Out

A lot of the bank levies I see trace back to the same starting point: a return that was never filed. The IRS did not wait. It prepared one for the taxpayer, assessed the tax, sent the notices, and eventually levied the bank.

If that is your story, the good news is that the assessment the IRS made without you is often not the last word. The bad news is that fixing it takes work, and the levy does not wait for you to finish.

What a substitute for return is

IRC § 6020(b)(1) says that if any person fails to make a required return, or makes a false or fraudulent return, the IRS "shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise." Under § 6020(b)(2), a return made and subscribed by the IRS "shall be prima facie good and sufficient for all legal purposes."

The IRM describes two versions for individual income tax: the Substitute for Return (SFR) and the Automated Substitute for Return (ASFR), an automated non-filer program. Both use the § 6020(b) procedures when a taxpayer fails to file a required Form 1040 (IRM 5.1.15).

The IRS builds an SFR from the information it has. It may not reflect expenses, credits, dependents, or a filing status you would have claimed on your own return.

How an SFR becomes a bank levy

An SFR assessment is a tax assessment like any other. Once it is assessed, the collection sequence follows:

1. Notice and demand under IRC § 6303(a).
2. The federal tax lien under § 6321 if you do not pay.
3. A notice of intent to levy under § 6331(d) and a CDP notice under § 6330.
4. A levy on a source the IRS has on file, very often a bank account it learned about from a Form 1099-INT. See how the IRS finds your bank account.

The full sequence is in the timeline from assessment to bank levy.

The fix: file the original return

IRM 5.1.15.4.4 is direct: "A taxpayer must request reconsideration of an SFR assessment by filing an original return." The IRM adds that the IRS will accept a signed Form 1040-X as the original return if it is complete, signed, and has all required schedules.

The examination side says the same. IRM 4.13.1.2 describes audit reconsideration as the process the IRS uses "when the taxpayer contests a substitute for return (SFR) determination by filing an original delinquent return." Among the goals the IRM lists for reconsideration: making sure the assessed tax is correct, making sure collection is suspended while the request is considered when applicable, and supporting abatement in appropriate situations.

If your real return shows less tax than the SFR, the difference can be abated. Less tax means a smaller balance, and a smaller balance changes everything about the levy conversation.

Does filing stop the levy?

Not by itself, and not entirely. For reconsiderations, IRM 5.1.15.3.1 tells revenue officers to:

• Conduct a compliance check and bring you into compliance if needed.
• "Secure levy sources for future collection."
• "Suspend collection only on the amount being considered for an adjustment."
• Warn you that failure to respond or cooperate will send the case back to Collection, with no further consideration until the tax is paid.

So the part of the balance you are disputing with a real return can be held while it is reviewed. The rest stays collectible. That is why you pair the return with a release request.

Getting the current bank levy released

Filing the return is the long fix. The bank levy needs a short one. The usual grounds under § 6343(a)(1):

• Economic hardship. Missing returns are not a lawful reason to deny a hardship release. IRM 5.11.2.3.1.4 tells employees not to "refuse, delay or understate the release amount as a means to secure other compliance, e.g., missing tax returns," and not to condition hardship relief on receiving delinquent returns. See economic hardship release.
• Installment agreement. Here, filing matters. IRM 5.14.1.3 says a payment plan request is not treated as pending when delinquent returns are required; you must file and then submit a new proposal. See installment agreements.
• Facilitating collection. A plan to file, fix the balance, and pay what is actually owed is a collection argument. Make it.

If the bank already paid the IRS and your original return later reduces the tax below what was collected, raise the resulting credit or overpayment with the employee handling the reconsideration, and see getting levied funds returned.

Can you challenge the SFR in a CDP hearing?

Sometimes. Under IRC § 6330(c)(2)(B), you can dispute the underlying liability at a CDP hearing only if you did not receive a statutory notice of deficiency for it or did not otherwise have an opportunity to dispute it. If you never received the notice of deficiency for the SFR year, that matters. If you received it and let the 90 days under § 6213(a) pass, the liability fight usually moves to reconsideration instead. See CDP hearings.

Joint filers after SFRs

A common question from married couples: can we still file jointly? IRM 5.1.15.4.4 says that if the IRS prepared SFRs for both spouses, the three-year time limit in IRC § 6013(b)(2) is not applicable, and they can file a joint return at any time. If one spouse filed married filing separately, the joint return must be filed within three years from the original due date, excluding extensions. Joint filing can change the tax substantially, but it also makes the liability joint and several under § 6013(d)(3), which matters for future levies on either spouse's accounts.

A practical sequence

1. Get the levy under control first: calendar day 21, ask for a hardship or partial release if you qualify.
2. Pull your wage and income transcripts so your return matches what the IRS has, then add what it does not have.
3. File complete, signed original returns for the SFR years, with all schedules.
4. Ask Collection to note the reconsideration and suspend collection on the disputed amount.
5. File the other missing years too. You will need them for any payment plan or offer.
6. Propose a resolution on the corrected balance.

An SFR is the IRS's version of your tax return. You are allowed to file yours. Do it before the next levy, not after.

For more on catching up, see the firm's guide on unfiled tax returns.