An IRS substitute return does not prevent a failure-to-file penalty

Plain-English summary

Chief Counsel advised that a taxpayer who does not file a return may still owe the section 6651(a)(1) failure-to-file penalty after the IRS prepares a substitute for return. Section 6651(g)(1) says the substitute return is disregarded when determining that penalty. By contrast, section 6651(g)(2) treats the substitute return as the taxpayer's return when applying the failure-to-pay penalties in section 6651(a)(2) and (3). The corresponding Treasury regulation makes the same distinction. Preparing the substitute return therefore does not cure or otherwise affect the taxpayer's failure to file.

Ruling snapshot

• Question: Does an IRS-prepared substitute for return prevent the failure-to-file penalty from applying?
• Outcome: Advice given, the substitute return is disregarded for the failure-to-file penalty
• Key authorities: IRC §§ 6020(b), 6651(a)(1)-(3), 6651(g); Treas. Reg. § 301.6651-1

Full text (IRS public release)

ID: CCA_2024092412171548 [Third Party Communication:

UILC: 6651.00-00 Date of Communication: Month DD, YYYY]

Number: 202441013
Release Date: 10/11/2024
From: ------------------------------
Sent: Tuesday, September 24, 2024 12:17:16 PM
To: --------------------
Cc: ------------------
Bcc:
Subject: 6651 Failure-to-file penalty with SFR preparation

Hi ----------,

We were asked whether a taxpayer who fails to file a return may be subject to a penalty
under IRC § 6651(a)(1) for failure to file even if the Secretary creates a Substitute For
Return (SFR) pursuant to IRC § 6020. The answer is that the taxpayer may be subject
to the penalty, as the SFR is disregarded for purposes of this determination.

Section 6651(a) distinguishes between the penalties for failure to file (paragraph (1))
and failure to pay (paragraphs (2) and (3)). Section 6651(g) makes this same distinction
for SFRs: Section 6651(g)(1) provides that a return prepared by the Secretary “shall be
disregarded for purposes of determining the amount of the addition under paragraph (1)
of subsection (a),” the paragraph authorizing the failure-to-file penalty (emphasis
added). In contrast, § 6651(g)(2) provides that an SFR “shall be treated as the return
filed by the taxpayer” for additions “under paragraphs (2) and (3) of subsection (a),” the
paragraphs authorizing penalties for failure to pay. This distinction also appears in 26
C.F.R. § 301.6651-1: “A return prepared by the Secretary under section 6020(b) will be
disregarded for purposes of determining the amount of the addition to tax for failure to
file any return pursuant to paragraph (a)(1) of this section. However, the return prepared
by the Secretary will be treated as a return filed by the taxpayer for purposes of
determining the amount of the addition to tax for failure to pay the tax shown on any
return and for failure to pay the tax required to be shown on a return that is not so
shown pursuant to paragraphs (a)(2) and (3) of this section, respectively” (emphasis
added).

When an SFR is prepared for a taxpayer, the SFR is disregarded for purposes of
determining liability for the failure-to-file penalty. As a result, if the taxpayer has failed to
file a return, their liable for the failure-to-file penalty is determined solely based on that
failure and is unaffected by preparation of an SFR.

Thanks.

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