New IRS Initiative Focuses on High-Income Non-Filers

The Internal Revenue Service (IRS) has announced a new enforcement initiative focused on high-income non-filers. According to a recent News Release, the IRS is specifically targeting high-income taxpayers who failed to file returns between 2017 and 2021. As the IRS calculates failure-to-file and failure-to-pay penalties based on the amount due, targeted taxpayers can face substantial liability, and they will need to work closely with an experienced Texas IRS dispute lawyer to avoid unnecessary consequences.

IRS Plans to Use Inflation Reduction Act Funding to Target High-Income Taxpayers

The IRS’s high-income non-filer initiative is being spurred, in part, by the agency’s access to additional funding under the Inflation Reduction Act. As the recent News Release explains, “Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that didn’t allow these cases to be worked. [But, w]ith new . . . funding available, the IRS now has the capacity to do this core tax administration work.” This, combined with the six-year statute of limitations for criminal tax evasion at the federal level, explains why the IRS is specifically focusing on high-income taxpayer filing deficiencies since 2017.

To identify taxpayers to target under its initiative, the IRS is relying on information it receives from third parties. This includes information disclosed on Forms W-2 and 1099, among other filings. According to the IRS’s News Release, to date the agency has identified more than 100,000 non-filers with income between $400,000 and $1 million, and it has identified an additional 25,000 non-filers with income of $1 million or more.

Understanding IRS Notice CP59

The IRS is using Notice CP59 to inform taxpayers that they are delinquent on their federal returns. As the IRS’s News Release states, “People receiving these letters should take immediate action to avoid additional follow-up notices, higher penalties as well as increasingly stronger enforcement measures.” While this is true in all cases, in light of the IRS’s initiative targeting high-income non-filers, high-income taxpayers who receive Notice CP59 should promptly engage experienced counsel to help them chart their next steps.

On its website, the IRS advises that taxpayers who receive Notice CP59 should “[f]ile their signed, personal tax return immediately or explain why a return is not required.” A return may not be required if either: (i) the taxpayer has filed the tax return(s) in question; or, (ii) the taxpayer was not required to file a return for the year(s) in question. However, as U.S. taxpayers are required to report their worldwide income from all sources regardless of whether they owe federal income tax, relatively few Notice CP59 recipients are likely to fall into the latter category. With this in mind, high-income taxpayers who are operating under the assumption that they were not required to file a return should consult with a Texas IRS dispute lawyer to confirm whether their assumption is correct, and then they should work with their counsel to make the appropriate filing(s) with the IRS.

Additionally, while filing a delinquent return may be a necessary step for high-income non-filers to come into compliance, solely filing a delinquent return may not be the best approach. Filing a delinquent return does not preclude enforcement; and, if the IRS has reason to believe that a high-income taxpayer willfully failed to file a return, it can work with the U.S. Department of Justice (DOJ) to pursue criminal charges. These charges carry substantial risks (as discussed in greater detail below); and, as a result, high-income taxpayers who have delinquent filings should work with their counsel to target a final resolution that eliminates the risk of an indictment.

Understanding the Risks of Failing to File a Federal Tax Return

Even when non-filing does not trigger criminal prosecution, high-income non-filers can face substantial risks. The IRS imposes civil penalties for both failure to pay and failure to file. These penalties are calculated as five percent of the amount due for each month that a return remains unfiled, up to a maximum of 25 percent per penalty. Unpaid penalties accrue interest as well, “starting on the due date of the amount you owe and . . . continu[ing] to accrue until the balance is paid in full.”

Of course, taxpayers who have failed to pay what they owe remain liable for their unpaid taxes as well, and back taxes also continue to accrue interest through the date of full payment.

As noted above, allegations of willful non-filing can also lead to criminal prosecution, and the IRS’s News Release makes clear that this is a very real possibility under the agency’s current high-income non-filer initiative. Under the criminal enforcement provisions of the Internal Revenue Code, failure to file can lead to charges and penalties including (but not limited to):

• Willful Failure to File – Willfully failing to file a tax return is a federal offense that carries up to a $25,000 fine for individuals ($100,000 for organizations) and up to one year of federal prison time.
• Attempt to Evade or Defeat Tax – Willfully attempting to evade federal tax liability is a federal offense that carries up to a $100,000 fine ($500,000 for organizations) and up to five years of federal prison time.

Depending on the circumstances involved, high-income taxpayers targeted in failure-to-file cases can face criminal prosecution under other federal statutes as well. For example, failing to disclose foreign financial holdings (including offshore bank accounts) on an FBAR or IRS Form 8938 can lead to charges under the Bank Secrecy Act that carry up to a $250,000 fine and five years of imprisonment.

Request a Confidential Consultation with Texas IRS Dispute Lawyer Lawrence Brown

If you are a high-income taxpayer and you received Notice CP59 from the IRS or have concerns about facing prosecution for failure to file a federal tax return, we encourage you to contact us promptly for more information. To request a confidential consultation with Texas IRS dispute lawyer Lawrence Brown, please call 888-870-0025 or tell us how we can reach you online today.