There may be years in which you do not file a federal income tax return because your income was below the filing requirements based on your filing status and other considerations. Or you may have not filed a return because you thought you didn’t need to. The IRS has access to information on your income based on W-2 and 1099 forms, among others. Based on that information, if the IRS sees that you didn’t file a return and believes you should have, you could receive a Notice of Proposed Assessment.
The IRS isn’t aware of the exemptions, deductions and credits you qualify for, and that reduce your taxable income, until you actually file a return. The IRS may assume that your filing status is single, or married filing separately, when in reality you could file as married filing jointly or head of household, which would result in a lower tax rate. The IRS may assume fewer exemptions for dependents, and the proposed assessment may use the standard deduction, when you actually could itemize deductions. And if you sold investment or other property and a 1099 was issued, the IRS has information on your total proceeds from the sale but not your cost basis in the property you sold, which reduces your gain on the sale.
So a Notice of Proposed Assessment, based on the information the IRS has on your income, may not be an accurate picture of your tax liability. Nevertheless, if you receive a notice, it is important to respond, and to file a tax return if necessary. If you don’t, the IRS can assume the information it has is correct, and will proceed to file a Substitute for Return for you.
The importance of a Substitute for Return is that it enables the IRS to begin collection efforts. Unless you file a return to show that your actual tax liability is less than what the IRS has proposed, you will be liable for paying what the IRS determines for you. In addition to the tax due, this can result in penalties and interest for not filing a return and for late payment. According to its collection process, the IRS could eventually garnish your wages or other sources of income, or place liens on your assets.
According to the IRS, when you receive a Notice of Proposed Assessment, you have 30 days to file a completed and signed tax return including all the schedules and forms with a cover letter. Or you can sign and date the Consent to Assessment and Collection form, which means you agree with the assessment, or send a statement explaining why you believe you are not required to file.
It is in your interest to respond to the notice and file a tax return. It is very possible you will owe less than the IRS is proposing, or you may not owe any tax. And you can avoid additional collection efforts by the IRS.
Need to file a past due return? IRS
Understanding your notices regarding past due filing, IRS