Two Creator Businesses, Years of Unfiled Returns, and IRS Substitute Returns

This scenario is an illustrative composite of a situation taxpayers commonly face. It is not a record of any client engagement, and it is not tax, legal, or accounting advice. Rules, thresholds, and IRS procedures change, and every situation depends on its own facts.

Creator income rarely arrives in a neat form. Brand deals, platform payouts, affiliate commissions, and products sent for review come in from many directions, and none of it has tax withheld. When two spouses each run a content business, one of them with partners, falling behind can happen quickly. The longer it runs, the more likely it is that the IRS files for you.

The situation

A married couple each run a content business. His is a solo media business built on brand sponsorships, platform revenue, and affiliate links. Hers is a content venture co-owned with three partners, set up as a limited liability company taxed as a partnership.

Neither has filed a personal return for several years, and the partnership has never filed its own return. Their records exist (bank statements, platform dashboards, contracts), but the books were never completed. Then IRS letters arrive showing tax assessed for years they never filed, at amounts far higher than they expected.

Why the IRS numbers look so high

When a return isn't filed, the IRS can prepare one for you under section 6020(b) of the Internal Revenue Code. This is called a substitute for return. It is built only from the information returns the IRS has on file: Forms 1099-NEC, 1099-K, and 1099-MISC from brands and platforms.

A substitute return typically:

• taxes the gross amounts reported, with no business expenses deducted;
• uses a less favorable filing status than married filing jointly, with only the standard deduction;
• adds self-employment tax on the full gross amount;
• adds failure-to-file and failure-to-pay penalties, plus interest.

For a business with real costs, such as equipment, editing, software, travel, and agent fees, that can overstate the tax by a wide margin.

What's at stake

Penalties that stack. The failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. The failure-to-pay penalty adds 0.5% per month, also up to 25%. Interest runs from the original due date and compounds daily.

The partnership's own penalty. A late partnership return (Form 1065) carries a separate penalty under section 6698. It is charged for each partner, for each month the return is late, for up to 12 months. With four partners, it adds up quickly, even when the partnership itself owes no tax.

Partners who can't file. Each partner needs a Schedule K-1 from the partnership to report their share. Until the partnership return is prepared, none of the four partners can file accurately.

No time limit on unfiled years. When no return is filed, the normal three-year period for the IRS to assess tax never starts (section 6501(c)(3)). In practice, IRS enforcement policy generally asks delinquent filers for the last six years.

Collection. If the IRS issues a statutory notice of deficiency (the "90-day letter") and nothing is filed or petitioned, the substitute amounts are assessed and can move to collection: liens, levies, and refund offsets.

How it's typically resolved

### 1. Get the IRS's view first Request IRS wage and income transcripts and account transcripts for every open year, for both spouses and for the partnership. These show every information return filed under their names, any substitute assessments, and any notices issued. They define the scope of the catch-up and confirm which deadlines are live.

### 2. Rebuild the books for both businesses Reconstruct income and expenses from bank statements, platform reports, brand contracts, and receipts. Keep the two businesses separate. Reconcile reported income to every 1099. Platform-reported gross amounts often include fees, refunds, and chargebacks that have to be backed out to get to actual income.

Creator-specific points that usually matter:

• Gifted products received in exchange for content are income at fair market value.
• Equipment (cameras, lighting, computers) is depreciated or expensed under the rules for each year.
• Agent and manager fees, editing, and software are ordinary business expenses.
• A home studio qualifies only if the space is used regularly and exclusively for the business.
• Wardrobe is generally not deductible unless it is unsuitable for everyday wear.
• Travel and vehicle costs need stricter records under section 274(d): dates, places, business purpose, and mileage.

### 3. File the partnership returns first Prepare the late partnership returns and issue Schedule K-1s to all four partners. The personal returns of every partner depend on these figures, so this step usually comes before the personal returns are finalized.

### 4. File original personal returns File accurate original returns for each year in scope. Where a substitute assessment exists, the IRS reviews the filed return and adjusts the assessment. If the assessment was already finalized, the process is called audit reconsideration. Compare married filing jointly against married filing separately for each year. Joint filing usually produces less tax, but both spouses become liable for the full amount.

Each return also calculates self-employment tax and the qualified business income deduction (section 199A) on both businesses.

### 5. Request penalty relief First-time penalty abatement can remove failure-to-file and failure-to-pay penalties for one tax period if the prior three years were clean. In a multi-year catch-up, it is typically applied to the earliest year. Later years need reasonable-cause relief, which depends on the facts. First-time abatement can also apply to the partnership's late-filing penalty.

### 6. Arrange payment If the balance can't be paid in full, an installment agreement can be requested once all required returns are filed. Interest continues to run and generally cannot be removed, so paying faster lowers the total cost.

Common mistakes

• Waiting for the IRS to "finish" the substitute returns before responding. Deadlines on the notices are real.
• Filing only the years the IRS asked about, leaving other years open.
• Filing personal returns before the partnership return, then having to amend when the K-1 figures change.
• Deducting travel, meals, and vehicle costs without records that meet section 274(d).
• Leaving gifted products out of income.

What to gather before starting

• All IRS letters and notices received
• Bank and credit card statements for every year in scope
• Platform payout reports and annual tax forms
• Brand contracts and invoices
• Receipts for equipment and major expenses
• The partnership's operating agreement and its bank records

Typical outcome

Accurate original returns can replace substitute assessments at a much lower figure, because business expenses are finally counted. First-time abatement can remove penalties for one year, and reasonable-cause relief may reduce others. Interest generally remains. Any remaining balance can be placed on a payment plan, and once current, the couple can move to quarterly estimated payments and monthly bookkeeping so the gap doesn't reopen.

Frequently asked questions

### Can the IRS go back more than six years? Legally, yes. When no return is filed, there is no time limit on assessment. The six-year figure is IRS enforcement policy for delinquent filers, not a legal cutoff, and the IRS can ask for more in some situations.

### Will filing our own return replace the IRS substitute return? Generally, yes. The IRS reviews the filed return and adjusts the assessment to match accurate figures. Supporting records matter, because the IRS may ask for them.

### Does first-time abatement remove the interest too? It removes the penalty and the interest charged on that penalty. Interest on the underlying tax generally stays.

### Should we wait until we can pay before filing? Usually not. The failure-to-file penalty is much larger than the failure-to-pay penalty, and a payment plan is only available once returns are filed.

Next step

If you are behind on returns, for yourself or for a business with partners, book a free fit call to talk through where to start.