Blog · 14 October 2026

IRS Substitute for Return After Jackson: Nonfilers, Form 1099-R Pensions and §§6651/6654 — What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

Substitute for return (SFR) work is how the IRS turns a nonfiler’s third-party information returns into a deficiency case. In Jackson v. Commissioner, T.C. Memo. 2026-97 (September 28, 2026), the Tax Court sustained a $24,862 deficiency for tax year 2019 and $12,569.69 in additions to tax under §§6651(a)(1), 6651(a)(2) and 6654 against a retiree who never filed 2018 or 2019 returns. The IRS built an SFR under §6020(b) from a SamCERA Form 1099-R showing $140,064 of pension distributions; without proof of after-tax basis, the court treated the full amount as taxable. For US CPA firms, Jackson is a clean checklist case: SFR, Form 1099-R, basis records and the failure-to-file / failure-to-pay / estimated-tax stack.

What an IRS substitute for return does

Per the IRS page on filing past-due tax returns, if a taxpayer fails to file, the IRS may file a substitute return. That return might not give credit for deductions and exemptions the taxpayer could claim on a filed Form 1040. The IRS then sends a Notice of Deficiency CP3219N (90-day letter) proposing an assessment. The taxpayer generally has 90 days to file a past-due return or petition the Tax Court; doing neither lets the IRS proceed with the proposed assessment.

The IRS CP3219N guidance adds that filing your own return is still in the taxpayer’s interest so expenses and deductions can be claimed, and that a refund generally requires filing within three years of the due date for that year. Once the 90-day letter issues, there is no extension to file under the notice rules. For firms, the practical point is that an SFR is rarely the client’s best return—it is the IRS’s version built from W-2/1099 data.

What Jackson held

Andre Jackson held a San Mateo County Employees’ Retirement Association (SamCERA) account. For 2019, SamCERA issued Form 1099-R reporting $140,064 of distributions. He did not file Form 1040 for 2018 or 2019. The IRS prepared an SFR under §6020(b) that included the full $140,064, then issued a notice of deficiency on February 6, 2025 determining a $24,862 deficiency for 2019 plus additions totaling $12,569.69 under §§6651(a)(1) and (2) and §6654 (docket 7062-25).

Jackson petitioned the Tax Court. Per reporting of T.C. Memo. 2026-97 (TaxCourtBlog, October 12, 2026; Bloomberg Tax), he did not reasonably dispute the Form 1099-R under §6201(d): a vague suggestion that some portion might be nontaxable, without identifying specific errors or producing records, was not enough, and failure to file plus lack of cooperation undercut the “full cooperation” prong. The court held that retirement distributions are includible in gross income under §61(a) and §402(a) unless the taxpayer proves after-tax basis; Jackson introduced no basis evidence, so the full $140,064 was sustained as taxable retirement income.

The additions to tax stack

Jackson also sustained three separate additions. Under the Code as generally applied (and as the court described in sustaining the determinations):

• §6651(a)(1) failure to file. Generally 5% of the tax required to be shown for each month or fraction late, capped at 25%, unless the failure was due to reasonable cause and not willful neglect. Jackson admitted nonfiling and offered no reasonable-cause proof.
• §6651(a)(2) failure to pay. Generally 0.5% per month of unpaid tax shown on a return, capped at 25%, with the same reasonable-cause defense. An SFR prepared under §6020(b) can be treated as the return for this purpose (§6651(g)(2)); Jackson did not pay the tax shown on the SFR.
• §6654 estimated tax. An addition for underpayment of required estimated-tax installments. Unlike §6651, §6654 has no general reasonable-cause exception; statutory exceptions under §6654(e) must be shown. Jackson made no estimated payments and did not establish an exception.

The $12,569.69 figure is the combined additions the court sustained; do not assume a firm-level split without the opinion or transcripts. When clients already owe and need payment plans, offers in compromise or Automatic Exemption from Penalty context, see our IRS collection alternatives guide.

What to tell clients who “never filed” or ignore a 1099-R

• File before the SFR hardens into assessment. An accurate delinquent return can pick up withholding, basis recovery, deductions and credits the SFR omitted. After CP3219N, calendar the 90-day Tax Court window separately from any plan to mail a return.
• Form 1099-R is not optional income. Pension and other retirement distributions are generally ordinary income. After-tax basis must be documented (contribution history, Form 8606 where applicable, plan statements)—oral “I’m not sure it’s all taxable” does not meet §6201(d) or shift the burden.
• Nonfiling stacks penalties. Failure to file, failure to pay and estimated-tax additions can all attach to the same year. October 15 extension work does not erase a year that was never filed; see the October 15 extension checklist for current-year filing vs. pay distinctions.
• CP2000 and SFR are related but not the same. Underreporter matching often follows a filed return; SFR targets nonfilers. Both start from third-party data. For audit-rate and CP2000 framing with clients, see our IRS audit rate and CP2000 post.
• Refund clocks still run. Per IRS past-due guidance, claiming a refund for an unfiled year generally requires filing within three years of that year’s due date—waiting for an SFR can forfeit money the client would have recovered.

A short firm checklist

• Flag clients with missing recent-year returns and any Form 1099-R / W-2 / 1099 transcript activity in IRS Wage and Income transcripts.
• On pensioner and public-employee clients, ask early for basis documentation—not after the notice of deficiency.
• If CP3219N or another deficiency notice arrives, diary the petition deadline and decide whether to file a corrected return, petition, or both under counsel’s advice.
• Explain that an SFR can support the failure-to-pay addition even when the taxpayer never signed a Form 1040.
• Separate “we will file late” from “we will pay estimated tax / withholding”—§6654 does not forgive good intentions.

Where this fits for Tax Brew readers

SFR and nonfiler cases sit at the intersection of compliance catch-up and controversy. If your firm needs capacity on transcript pulls, delinquent-return preparation or notice response while signing professionals own the judgment calls, outsourced tax prep and bookkeeping support for US CPA firms can help. Email info@taxbrewglobal.com.

Check current guidance: this article summarizes IRS substitute-for-return / past-due filing guidance, CP3219N basics, IRC §§6020(b), 6651(a)(1)–(2), 6654 and 6201(d), and reporting of Jackson v. Commissioner, T.C. Memo. 2026-97 (September 28, 2026, Docket No. 7062-25; TaxCourtBlog October 12, 2026; Bloomberg Tax). Confirm the full opinion and transcripts before advising. This is general information, not tax or legal advice. Sources as of 14 October 2026.