IRS CP2566 Notice and the Road to a Substitute for Return
- Howard Richardson
- 12 minutes ago
- 5 min read
Receiving a notice from the Internal Revenue Service (IRS) can be a stressful experience. One such notice, the CP2566, is particularly important to understand as it signifies that the IRS has no record of your tax return and has taken the step of preparing one for you. This article provides a comprehensive overview of the CP2566 notice, the legal authority behind it, the implications for taxpayers, and the steps you should take if you receive one.
What is a CP2566 Notice?
A CP2566 notice is an official correspondence from the IRS informing a taxpayer that the agency has not received their tax return for a specific year. Consequently, the IRS has calculated their tax, penalties, and interest based on information reported by third parties such as employers (via Form W-2) and financial institutions (via Form 1099). This process is known as creating a Substitute for Return (SFR).
The notice will show a proposed amount of tax due. It is crucial to respond to this notice by the specified deadline, as ignoring it can lead to further collection actions.
The Legal Framework for Substitute for Return
The IRS' authority to prepare a tax return for a non-filing taxpayer is not arbitrary; it is grounded in federal law. The primary legal basis for this action is found in the Internal Revenue Code (IRC) and its corresponding Treasury Regulations.
Internal Revenue Code Section 6020(b)
IRC Section 6020(b), "Execution of return by Secretary," grants the Secretary of the Treasury the authority to create a tax return for any person who fails to file a required return or files a false or fraudulent one. The code states:
If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.
Any return created by the Secretary under this provision is considered "prima facie good and sufficient for all legal purposes."
Treasury Regulation 301.6020-1
Treasury Regulation 301.6020-1 further clarifies the process and requirements for a valid SFR. It specifies that a document (or set of documents) constitutes a return under section 6020(b) if it:
•Identifies the taxpayer by name and taxpayer identification number.
•Contains sufficient information to compute the taxpayer's tax liability.
•Purports to be a return.
The regulation explicitly mentions that the automated process that generates a Letter 2566 (the CP2566 notice) is a valid method for creating an SFR.
The Substitute for Return (SFR) Process
The SFR process is a systematic procedure the IRS follows when a taxpayer fails to file a return. The steps are as follows:
Identification: The IRS identifies non-filers through its automated systems by matching income reported by third-party payers against its records of filed returns.
Notice Generation: The IRS generates a CP2566 notice, which includes a proposed assessment of tax, penalties, and interest.
Response Period: The taxpayer is given a specific timeframe, typically 30 days, to respond to the notice.
Assessment: If the taxpayer does not respond, the IRS will formally assess the proposed tax liability, and the SFR becomes the taxpayer's official return for that year.
It is important to note that an SFR is rarely in the taxpayer's favor. The IRS prepares it using the filing status of "Single" or "Married Filing Separately" and does not include any deductions, credits, or exemptions the taxpayer may be entitled to. This results in a significantly higher tax liability than if the taxpayer had filed their own return.
Penalties Associated with Non-Filing
When the IRS creates an SFR, several penalties under IRC Section 6651 are typically applied:
In addition to penalties, interest will be charged on the underpayment of tax from the original due date of the return.
Your Options After Receiving a CP2566 Notice
If you receive a CP2566 notice, you have several options:
File Your Own Tax Return: This is often the best course of action. By filing your own return, you can claim the correct filing status, deductions, and credits you are entitled to, which will likely reduce your tax liability. If the return is from the past two years, you may be able to file it electronically. Otherwise, you will need to mail a paper return with the response form from the notice.
Accept the Proposed Assessment: If you agree with the information on the CP2566 notice and the proposed tax liability, you can sign the response form and return it to the IRS. You will then need to pay the amount due or arrange a payment plan.
Dispute the Notice: If you believe you are not required to file a tax return for the year in question, you should contact the IRS at the number provided on the notice to explain your situation.
The CP2566R Notice
There is a variation of the CP2566 notice called the CP2566R. This notice is sent when the IRS is holding a tax refund for a different year because you have an unfiled return. The CP2566R serves the same purpose as the CP2566 but also informs you that your refund may be used to offset the tax debt from the unfiled year if you do not respond.
Conclusion
The CP2566 notice is a serious matter that requires your immediate attention. It is a clear indication that the IRS believes you have an unfiled tax return and has taken the significant step of creating a Substitute for Return on your behalf. While the proposed tax liability on the notice may seem high, it is important to remember that you have the right to file your own, accurate return. By understanding the legal basis for the notice and your available options, you can take the necessary steps to resolve the issue and ensure you are in compliance with your tax obligations.
To learn more about how to fix your IRS issues, click the link to watch the free video, The Ultimate Guide to Solving Your IRS Tax Problems:
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