The CP2566R combines two problems: the IRS filed a Substitute for Return for a year you didn't file, and they're holding a refund from another year pending resolution. Your refund is being used as leverage to get you to file the delinquent return.
The Double Problem
First, the SFR. The IRS prepared a return based on income reported by third parties, with no deductions, no credits, and single filing status. The resulting tax assessment is almost certainly higher than what you actually owe.
Second, the refund hold. A refund you're owed from a different tax year is frozen until you either file your own return for the SFR year or accept the SFR proposed assessment. The IRS may offset the refund against the SFR balance, reducing or eliminating your refund entirely.
How to Fix Both Problems at Once
File your own return for the SFR year. Your return replaces the SFR and recalculates your actual liability with proper deductions, credits, and filing status. Once the IRS processes your return, the SFR assessment is adjusted to reflect your actual tax. If the adjustment results in a lower balance (or no balance), any remaining refund from the other year is released.
If the SFR year results in a refund once you file your actual return, that refund is added to the one being held. You could end up with a larger total refund than you expected.
Don't Wait
Every day you wait, the SFR balance accrues penalties and interest on an inflated amount. The sooner you file your actual return, the sooner the balance is corrected and your refund is released.
If you've received a CP2566R, call us at (813) 229-7100. We file SFR replacement returns regularly.