The Internal Revenue Authority may make estimates on how much a tax payer should remit. These estimates are referred to as proposed assessments. Usually, the IRS will send you a letter to the tax payer, referenced “Notice of Proposed Assessment”, which may be deemed as a personal invitation to file your back taxes.
Because people are free to arrange their financial affairs in such a way to take advantage of any tax benefits, the IRS may not know every tax deduction and credit you might qualify for. The only way for the IRS to really know how much you owe is for you to tell the IRS what your tax liability is. And the only way to do that is to file a tax return.
The IRS may be unaware of which tax deductions and credits you may qualify for owing to the fact that people are open to planning and arranging their financial activities and affairs in the most tax- economic way. The only way to inform the IRS about what tax credits you qualify for
If a tax return isn’t filed, the IRS may sometimes estimate your tax liability, in order to figure out what you might owe, if you indeed owe. The proposed assessment may be seen as an educated guess, and may be avoided if you file a return, as it is the only way the IRS will be furnished with information on your actual tax situation.
Substitute Tax Returns
Failure to respond to this notice may lead to the IRS filing a tax return on your behalf. This is called a Substitute for Return (SFR), and is an official way for the IRS to make an estimate on how big your tax bill might be. The purpose of an SFR is to arrive at a definite dollar amount, before the initiation of collection efforts. Upon issue of a Proposed Assessment, and subsequent failure to respond, the assessment becomes final. This means that the IRS can now legally collect on the tax for ten years.
To avoid an IRS assessment, the fastest and most convenient way would be to file a tax return. The IRS is legally obligated to accept your tax return, as opposed to its own computation. This is because your self-filed tax return has your own signature on it, meaning you have accepted that you have a defined tax liability. More so, it would save loads of time and money that would be spent trying to correct erroneous SFRs.