IRS to Focus on High-Income Non-filers

IRS launches new effort aimed at high-income non-filers; 125,000 cases focused on high earners, including millionaires, who failed to file tax returns with financial activity topping $100 billion

In the continuing effort to improve tax compliance and ensure fairness, the Internal Revenue Service announced a new effort focused on high-income taxpayers who have failed to file federal income tax returns. There have been more than 125,000 such instances since 2017.

Funding for the Initiative

The new initiative, made possible by Inflation Reduction Act funding, begins with IRS compliance letters going out on more than 125,000 cases where tax returns haven’t been filed since 2017. The mailings include more than 25,000 to those with more than $1 million in income, and over 100,000 to people with incomes between $400,000 and $1 million between tax years 2017 and 2021.

How Information is Obtained

These are all cases where the IRS has received third-party information – such as through Forms W-2 and 1099s – indicating these people received income in these ranges but failed to file a tax return. Due to severe budget and staff limitations, the IRS non-filer program has only run sporadically since 2016. With new Inflation Reduction Act funding available, the IRS now has the capacity to do this core tax administration work.

“At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return,” said IRS Commissioner Danny Werfel. “The IRS is taking this step to address this most basic form of non-compliance, which includes many who are engaged in tax evasion.”

Non-filers Will Receive Notices in the Mail

The IRS will begin mailing these compliance alerts for failure to file a tax return, formally known as the CP-59 Notice. About 20,000 to 40,000 letters will go out each week, beginning with the filers in the highest-income categories. The IRS noted that some of these non-filers have multiple years included in the case count, so the number of taxpayers receiving letters will be smaller than the actual number of notices going out.

People receiving these letters should take immediate action to avoid additional follow-up notices and higher penalties as well as increasingly stronger enforcement measures. People in this category should also consult with a trusted tax professional so they can quickly file their late tax returns and pay delinquent tax, interest, and penalties.

Some Non-filers May Be Due a Refund

Since the IRS is not aware of the potential credits and deductions these people may have, the amount of potential revenue to be gained from this effort is uncertain. The third-party information on these taxpayers indicates financial activity of more than $100 billion. Even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases. At the same time, some non-filers may actually be owed a refund.

Other Initiatives Underway

The new non-filer initiative is part of a larger effort underway with the IRS working to ensure large corporate, large partnership, and high-income individual filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to shelter or manipulate their income to avoid taxes. The IRS is now taking swift and aggressive action to close this gap.

The new non-filer effort focusing on high-income taxpayers who haven’t submitted a tax return is part of this larger effort to expand IRS compliance work to ensure fairness in the tax system. For example, the IRS is continuing to pursue millionaires that have not paid hundreds of millions of dollars in tax debt. The IRS has collected nearly $500 million in ongoing efforts to recoup taxes owed by 1,600 millionaires with work continuing in this area. In other areas, the IRS is pursuing multi-million-dollar partnership balance sheet discrepancies, ramping up audits of more than 75 of the largest partnerships using artificial intelligence (AI) as well as other areas.

IRS Actions Escalate if Tax Returns Are Not Filed

People who do not respond to the non-filer letter will receive additional notices and other enforcement actions. Ultimately, this can lead to a variety of IRS compliance activity, including collection and audit action as well as potential criminal prosecution. As part of this, the IRS can also take steps to file what’s known as a Substitute for Return (SFR).

If a person repeatedly fails to respond and does not file, the IRS may create a substitute tax return for the taxpayer. The IRS calculates this substitute tax return based on wages and other income reported to the agency by employers, financial institutions, and others. The return factors in the tax, penalty, and interest owed by the taxpayer.

This tax return might not give the person credit for deductions and exemptions they may be entitled to receive because the IRS does not know each taxpayer’s situation. In this scenario, the IRS will send a Notice of Deficiency CP3219N (a 90-day letter) proposing a tax assessment. The taxpayer will have 90 days to file the past due tax return or file a petition in Tax Court. If the person does neither, the IRS will proceed with the proposed assessment.

If the IRS files a substitute return, it is still in the person’s best interest to file their own tax return to take advantage of any exemptions, credits, and deductions they are entitled to receive. The IRS will generally adjust the account to reflect the correct figures.

The tax return the IRS prepares for these taxpayers will likely lead to a tax bill, which, if unpaid, will trigger the collection process. This can include such actions as a levy on wages or a bank account or the filing of a notice of federal tax lien. If a taxpayer repeatedly does not file, they could be subject to additional enforcement measures, such as additional penalties and/or criminal prosecution.

A Final Note

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