SFR or Substitute for Return is a notation on the “Account Transcript” no prospective bankruptcy debtor wants to see if he or she is looking to discharge otherwise dischargeable taxes. The “discharge” is what eliminates debt: http://leverlaw.com/discharge.php. Taxes need to be at least three years from the date the return was first due and payable, and the tax return must have been filed for at least two (2) years.

The SFR problem is one of the “two year rule” cited above. Some tax payers don’t quite get around to filing their tax return timely, or may even be years behind. What may happen is the IRS will file a tax return for you, which is based on assumed numbers taken from prior returns or merely from W2s or 1099s reported to it. If that happens, the IRS position is you’ve never filed a tax return even if you subsequently file your own return. The IRS position is that their return is the true one, not yours. The IRS takes the position they filled up that slot and is forever filled in for them, and your return is some other animal no longer entitled to be called a “return.”

This has been adjudicated differently in different jurisdictions throughout the U.S. Here in the 9th Circuit, there is some pending litigation that may affect this interpretation. For now, you can assume that if there’s an SFR on your Account Transcript (a special kind that I’ll detail in another blog post) that you’re just out of luck for discharging that tax year. I’m not real hopeful for the pending litigation either, but I’ll update this if that attitude proves wrong.