If you fail to file your tax return when you have a legal obligation to do so, the IRS can use the Substitute for Return (SFR) procedure to file it for you. There are several disadvantages to this scenario from a taxpayer’s perspective, and you should take action immediately upon receiving a notice that you haven’t filed your tax return.
First, the IRS will file your return based on reported information from your employers or businesses that paid you as an independent contractor, usually from W-2 or 1099 forms. However, the IRS has no way of knowing what deductions, exemptions, credits, or losses you are eligible to claim your tax return. Therefore, they will not give you credit for any of these amounts that could substantially reduce your tax liability.
Second, the failure to file a tax return is one of the badges of tax fraud, and the IRS may scrutinize a taxpayer who fails to file a return for other indications of tax fraud. This can result in civil tax fraud penalties of 75% of the amount of tax owed, or criminal tax fraud charges, that could result in more fines or jail time.