IRS Targeting High-Income Taxpayers with Unfiled Returns
The IRS is intensifying its focus on high-income filers, utilizing new funding to address unfiled returns. In February 2024, the agency sent letters regarding 125,000 cases of unfiled tax returns dating back to 2017. This initiative comes as third-party data suggests these taxpayers have over $100 billion in unreported income.
Of the notices issued, 25,000 went to individuals with incomes exceeding $1 million, while the remaining 100,000 were sent to those earning between $400,000 and $1 million. If you have unfiled returns, time is of the essence. Taking prompt action is crucial to avoid repercussions from the IRS.
Increasing Enforcement and Closing the Tax Gap
The IRS estimates that substantial tax revenues go uncollected annually due to unfiled returns and unpaid taxes. However, due to the COVID-era suspension of many collection activities and previous funding limitations, the IRS has not pursued these cases vigorously in recent years. The un-filer program has not been fully operational since 2016, and from 2020 to 2022, many notices were not sent.
With additional funding from the Inflation Reduction Act (IRA), the IRS is now concentrating its efforts on high-income filers, large partnerships, and corporations. This approach has several motivations: high-income earners typically have the largest tax liabilities, making them the most profitable targets for the agency. Moreover, the IRS aims to avoid the negative public perception that might arise from targeting small businesses or low-income individuals.
IRS Plans for High-Income Non-Filers
The IRS is expected to send out CP59 non-filer notices, with 20,000 to 40,000 letters going out weekly through March. If these taxpayers do not respond to the initial round of notices, the IRS will escalate its approach, potentially issuing a Substitute for Return (SFR) for those who remain non-compliant.
An SFR includes all income reported to the IRS through W-2s, 1099s, and other payment forms but does not account for any deductions or expenses. Taxpayers will receive a CP3219 notice of deficiency, granting them 90 days to file the past due return or petition the Tax Court. Failure to respond may lead to proposed taxes being assessed, allowing the IRS to initiate collection actions such as wage garnishments, bank account seizures, and asset levies.
Should You Be Concerned?
High-income taxpayers should take this situation seriously. The IRS has already collected approximately $500 million in unpaid taxes from just 1,600 millionaires. Additionally, the agency is targeting 75 of the country’s largest partnerships after utilizing artificial intelligence to identify multi-million dollar discrepancies in their financial records.
Consequences of Not Filing
The penalties for failing to file can be significant. The failure-to-file penalty is 5% of your tax due per month, up to a maximum of 25%. If you file a year late, you may incur the full 25% penalty. For instance, if you owe $10,000, that penalty alone could amount to $2,500. Additionally, the failure-to-pay penalty can compound this amount, ranging from 0.5% to 1% of your tax balance monthly, also capping at 25%. These penalties, combined with accruing interest, can substantially increase your tax debt.
If you do not file, the IRS can issue an SFR, leading to further involuntary collection actions, including federal tax liens and wage garnishments.
What to Do Next
If you haven’t filed your taxes in years, it’s imperative to catch up, especially if you are a high-income filer. The IRS is ramping up its enforcement efforts and resuming collection actions that were paused during the pandemic.
The agency has recently hired numerous personnel to improve customer relations and is actively seeking additional agents, primarily for technical positions focused on audits.
The Bottom Line
Now is the time to address your tax filing obligations. High-income earners should proactively file their returns to mitigate potential penalties and repercussions. By doing so, you may be able to request penalty abatement or negotiate a settlement if your financial situation prevents you from covering the past-due tax amount.
If you are facing criminal tax issues, consider looking into the IRS’s Criminal Investigation Voluntary Disclosure Practice, as qualifying for this requires you to contact the IRS before they contact you.
To get the help you need, visit our website or contact us from our contact page. Our tax professionals specialize in assisting high-income filers with unfiled returns and can guide you through the process to ensure compliance and protect your interests.
