The IRS needs a tax return to start the tax assessment process. If the taxpayer does not file, the IRS will file a return for them. This is known as a ‘Substitute for Return’ or SFR in government parlance. The SFR is usually prepared by the IRS computers using all the information that they have on file for that taxpayer. Electronic information includes filings of documents like the 1099s and W-2s that we are all familiar with. The problem comes up when those documents are incorrect, bringing up the question ‘How do I fix this?”.
First of all, the taxpayer is under no obligation to correct an SFR that understates his or her tax. The taxpayer in these cases did not lie to the IRS or perjure themselves on their tax return. The IRS filed it themselves using third-party information and it is on them to fix their own errors. If the taxpayer is happy with the return that was filed, they should just simply pay the tax bill and move on.
Sometimes that 3rd party information is wrong the other way. The result is that the IRS assesses a higher tax than it should have. How to fix it? The answer is simple. Just file the return that you should have filed showing the correct information.