Since the Internal Revenue Service (IRS) has received its supplemental funding under the Inflation Reduction Act, the IRS has continuously focused on high-income earners, partnerships, and large corporations. Under its most recent initiative, the IRS targets high-income individuals who have failed to file a federal tax return over the last few years.
The Numbers
- 125,000 Cases: The IRS is currently scrutinizing over 125,000 instances where the IRS has received third-party information (W-2s, and IRS Form 1099) indicating that the individual had received income but failed to file a federal tax return.
- Income Thresholds:
- Over 25,000 letters are being sent to non-filers with more than $1 million in income.
- Over 100,000 letters are directed at people with incomes ranging between $400,000 and $1 million during tax years 2017 to 2021.
IRS Enforcement Actions
IRS Step 1:
Compliance Letters. The IRS will issue compliance letters (CP59 notices) to individuals who have not filed a tax return. These notices inform the individual that they are currently not in compliance with their filing obligations.
Actions Taxpayers Can Take: Taxpayers who receive a compliance letter should take notice that the IRS is now targeting them for compliance. At this stage, the IRS has not assessed against the taxpayer, but failure to comply could result in such an assessment. Taxpayers should work with a tax professional to prepare past-due tax returns to ensure that they are maximizing their available tax credits and deductions.
IRS Step 2:
Substitute Tax Return. If the individual fails to file a tax return, the IRS will create a substitute tax return based on the information on file. This substitute tax return will include interest and penalties but will not include any deductions or credits to which the taxpayer may be entitled.
Actions Taxpayers Can Take: If the IRS files a substitute tax return on the taxpayers’ behalf, it does not prevent the taxpayer from filing an “actual” tax return. A substitute tax return solely allows the IRS to begin taking collection action based on the information they have on file. Taxpayers are still encouraged to file their tax returns to start the statute of limitations for collection and ensure that the IRS has the most up-to-date information.
IRS Step 3:
Notice of Deficiency. If the taxpayer still does not file a tax return, the IRS will send a notice of deficiency indicating that the taxpayer owes tax and must comply within 90 days of receipt or file a petition with the US Tax Court. Failure to respond to the notice of deficiency and/or file a tax return can result in the IRS filing a federal tax lien or levying your wages or bank accounts. In addition, the IRS can assess a failure-to-file tax penalty, resulting in additional tax obligations of between 5-25% of the original assessment.
Actions Taxpayers Can Take: Taxpayers who have received a notice of deficiency should note that they have an opportunity to challenge the notice but must due so within a specified timeframe. Taxpayers can work directly with the IRS or with a qualified tax professional to appeal directly within the IRS to challenge the assessment. However, note that if you miss your appeal timeline, you still have options that become more limited.
Based on its increased funding and resources, the IRS continues to find ways to crack down on higher-income individuals. To understand your risk of non-compliance and support becoming compliant with IRS tax obligations, please get in touch with a member of our Tax Practice Group, including our Tax Practice Chair, Demetrius Robinson, at (614) 427-5749 or DJR@kjk.com.