Some procrastinators may be relieved to know that the IRS will actually file a tax return for you if you don’t get around to doing it yourself. If the agency finds out that you had reportable income but never filed a return, then the agency steps in and prepares what it calls a “substitute for a return”, or a ghost return, for you. However, the price of having the IRS prepare a ghost return for you can be very high.
When the agency files a substitute return for you, it uses data only from the income side, meaning it doesn’t include items that might offset that income. The IRS works from W-2 reports provided by employers and reports of payments to self-employed people from companies that used their services. It also uses data from financial institutions about interest and dividends paid, and reports from brokers about any assets sold. The IRS then utilizes information derived from these sources and calculates your taxable income.
While the agency works hard to find out about what taxable income you had for the year, it does not put nearly as much effort in to figuring out what exemptions and deductions you may have been able to take. For example, the agency will not factor in exemptions for any dependants, deductions for mortgage interest or a big charitable contribution. It will treat you as a single person, even though you could have filed jointly.
It may seem like that the IRS is being too harsh towards people that have not filed. However, it is important to consider that the IRS gives procrastinators several warnings before filing the substitute return, which it uses as a last resort. Typically the ghost return isn’t prepared until at least a year has gone by since the due date for the actual return. The IRS also gives non-filers one last chance to correct their return. If the individual files what they should have in the first place, the IRS adjusts their account accordingly. This allows the taxpayer to take exemptions and deductions they were eligible for, and possibly be able to collect a refund.
So if you do end up getting a ghost return in the mail, then it is extremely important that you take action. If you fail to respond even after a substitute return has been filed, the IRS can retaliate by placing a levy on your paycheck until the bill is paid off, or by freezing your bank accounts or putting liens on your homes.