IRS Targeting High-Income Taxpayers With Unfiled Returns

The IRS has taken its new funding and set its sites on high-income filers. During the last week of February 2024, the agency sent out letters related to 125,000 cases of unfiled returns from high-income earners. The unfiled returns date back to 2017, and information received from third parties indicates that these taxpayers have over $100 billion in unreported income. 

The IRS sent 25,000 notices to people with over $1 million in income and the remaining 100,000 to people with income ranging from $400,000 to $1 million. If you have unfiled returns, time is up. If you don't take action soon, the agency is coming after you.

Increasing Enforcement, Closing the Tax Gap

The IRS estimates that hundreds of millions of tax dollars go uncollected every year due to unfiled returns and unpaid taxes, but due to a COVID-era suspension of many collection activities and a lack of funding, the IRS has not pursued these taxpayers for several years. The un-filer program hasn't operated in full force since 2016, and from 2020 to 2022, the IRS stopped sending out many notices. 

Armed with additional funding from the Inflation Reduction Act (IRA), the IRS is focusing its efforts on high-income filers, large partnerships, and corporations. There are several motives behind this strategy. First, high-wage earners have the highest tax liabilities, making them the most profitable taxpayers to pursue. Second, the IRS doesn't want to tarnish its image by going after small businesses or working Americans who often live paycheck to paycheck. 

Of course, these groups aren't off the hook for their tax liabilities; they just aren't likely to be exposed to the intense scrutiny applied to other groups. The IRS will issue tax liens for tax debts as low as $10,000. This comes after the IRS announced they will begin collecting on taxes owed prior to 2022 and sending out LT 38 notices to taxpayers to notify them that collections will be resuming on their debts. The IRS is starting to get back to normal operations after years of delay due to Covid set backs. 

IRS Plans for High-Income Non-Filers

The IRS plans to send the CP59 non-filer notice to these taxpayers, with 20,000 to 40,000 letters scheduled to go out weekly through March. If these taxpayers don't respond to the first round of notices, the IRS is going to escalate its approach. The agency may create a substitute for return for these taxpayers. SFRs show all of the income that the IRS has received on W2s, 1099s, and other payment forms, but they don't provide any deductions or expenses for the taxpayer. 

If the IRS issues an SFR, it will also send out a CP3219 notice of deficiency. This letter gives taxpayers 90 days to file the past due return or file a petition with the Tax Court. If they fail to do so, the proposed taxes are assessed against them, and the IRS can start collection actions such as wage garnishments, bank account seizures, and asset levies. 

Should You Be Worried?

If you're a high-income taxpayer, you should take this seriously. The IRS has already collected about $500 million in unpaid taxes from just 1,600 millionaires. The agency is also going after 75 of the country's largest partnerships after using artificial intelligence to spot multi-million dollar discrepancies in their balance sheets. 

Consequences of Not Filing

The failure-to-file penalty is 5% of your tax due per month, assessed monthly until you file. This penalty can get up to 25% of your balance, and it's assessed retroactively. For instance, if you file a year late, you incur the full 25% penalty. Thus if you owe $10,000, the penalty is $2,500. The failure-to-pay penalty stacks on top of this penalty. It ranges between .5 and 1% of your tax balance per month, up to 25%. These penalties alone can increase your tax debt by 50%. Interest also accrues on that amount. 

As indicated above, if you don't file, the IRS can also assess taxes against you through an SFR. Once taxes are assessed the agency can start involuntary collections including federal tax liens, wage garnishments, and tax levies. 

How Much Is the IRS Going to Collect?

The IRS expects to collect hundreds of millions of dollars in unpaid taxes through these efforts, but ultimately, the agency is unsure of how much is at stake. Again, the IRS has about $100 billion in income documents received from third parties related to these non-filers, but these documents don't necessarily reflect taxable income. 

To give you an example, imagine a restaurant owner who failed to file taxes. Their credit card processor may have sent the IRS a 1099-K showing nearly a million in payments. If the IRS issues a substitute for return based on these numbers, the taxpayer will owe hundreds of thousands. But if the taxpayer files a correct return, they may have business expenses that count against the majority of the income. The IRS says that some of these non-filers may even be entitled to refunds. 

What to Do Next?

If you haven't filed in years, it's time to get caught up, and that's especially important if you're a high-income filer. The IRS has increased funding, and it's ending its two-year-plus pause on many collection actions. 

In 2023, the IRS hired a wave of people to help improve customer relations, but as of late 2023, the agency started looking for 3,700 agents across 250 locations. These positions are primarily for high-grade technical positions focused on audits, and they're offering competitive pay and benefits to draw tax and accounting professionals out of the private sector. 

The Bottom Line

You need to get caught up on your tax filing obligations. If you are a high-income earner, the IRS is getting ready to come after you. To protect yourself, get ahead of the situation. If you file proactively, you may be able to request penalty abatement or possibly even a settlement if you don't have the assets or income to cover the past-due tax. If you're dealing with criminal tax issues, you may want to look into the IRS's Criminal Investigation Voluntary Disclosure Practice, but you can only qualify if you contact the IRS before they contact you. 

To get help now, use TaxCure to find a tax professional based in your area, who has experience with high-income filers and unfiled returns. The TaxCure search feature lets you narrow down the results by the problem you have or the solution you want. Then, you can read reviews and look for the perfect fit for your needs.