ARTICLE | March 07, 2024
Executive summary
IRS announces new initiative directed at high-income earners who have not filed prior year tax returns. IRS has identified 125,000 instances of non-compliance. There is estimated $100 billion of financial activity from these instances based on information from third parties. The IRS has started sending compliance letters to high-income taxpayers.
IRS launches new initiative directed at high-income taxpayers, including millionaires, who have failed to file tax returns. The IRS estimates there are 125,000 instances of non-filing equating to $100 billion of financial activity.
The IRS is utilizing funding from the Inflation Reduction Act (IRA) to continue their efforts to improve tax compliance and ensure fairness. The newest IRS initiative will focus on high-income taxpayers who have not filed federal income tax returns. The IRS will mail out compliance letters in more than 125,000 cases where taxpayers have not filed tax returns for years between 2017 – 2021. 25,000 letters will be mailed to non-filing taxpayers with more than $1 million in income, and 100,000 letters will be mailed to non-filing taxpayers with incomes between $400,000 and $1 million. The IRS is utilizing third-party information, such as Forms W-2s and 1099s, to identify which non-filing high-earning taxpayers will be receiving these compliance letters, formerly known as the CP-59 Notice. About 20,000 to 40,000 letters will go out each week beginning with the non-filers in the highest-income categories.
The IRS previously announced various initiatives using funding from the IRA to ensure complex partnerships, large corporations, and high-income individuals pay the taxes they owe, including this most recent announcement to target high-income non-filers. Another previously announced initiative is targeting individual taxpayers who had more than $1 million in income reported on their filed tax returns but had an outstanding tax liability in excess of $250,000. That initiative has collected nearly $500 million in tax revenue. Another initiative is the use of artificial intelligence to select the largest partnerships containing highest risk issues for examination. As of December, the IRS has opened examinations for 76 of the largest partnerships (on average over $10 billion in assets) in the U.S., including entities in industries such as hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms. These initiatives are part of the larger effort by the IRS to ensure fairness in the tax system.
Although the third-party information reporting financial activity of more than $100 billion for non-filers serves as the basis for this newest initiative, the amount of potential revenue to be gained is uncertain given potential credits and deductions that taxpayers may have. However, a conservative estimate by the IRS is that this initiative could generate hundreds of millions of dollars of unpaid taxes. Alternatively, some of these non-filing taxpayers may actually be owed a refund if they are still within the three-year window of opportunity to claim a tax refund.
High-income taxpayers who have not filed prior tax returns should consult with a trusted tax professional to assist with compliance by filing the late tax returns and paying the delinquent tax, including penalties and interest. The failure-to-file penalty is 5% of the amount owed every month, up to 25% of the tax liability.
In the event that a taxpayer receives a compliance letter, action should be taken quickly to avoid additional follow up notices, higher penalties, as well as increasingly stronger enforcement measures. Further, if the taxpayer fails to respond to compliance letters, the IRS can instead file what is known as a Substitute for Return (SFR). An SFR calculates the tax based on wages and other income reported to the IRS by third parties such as employers, financial institutions, and others. The SFR factors in the tax, penalties, and interest owed by the taxpayer, but does not factor in things like credits, deductions, or exemptions since the IRS would not know each taxpayer’s personal situation. Therefore, it is still better for the taxpayer to file their own tax return to be able to claim deductions, credits, and exemptions. In this SFR scenario, the IRS will issue a Notice of Deficiency CP3219N (a 90-day letter) proposing a tax assessment after which the taxpayer will have 90 days to file the late tax return or file a petition in Tax Court. If the taxpayer does neither, the IRS will proceed with the proposed assessment.
The SFR for these taxpayers will likely cause a tax bill and, if unpaid, will start the collection process. Collections can include actions such as a levy on wages or a bank account or the filing of a federal tax lien. If the taxpayer does not file for multiple years, they could be subject to additional enforcement, including additional penalties or even criminal prosecution. It is highly recommended that non-filers consult with a qualified tax professional to file late tax returns and pay outstanding tax liabilities to ensure they are in compliance moving forward.
Do you have questions or want to talk?
Call us at (800) 232-9547 or fill out the form below and we’ll contact you to discuss your specific situation.
This article was written by Alina Solodchikova, Jackie Sullivan and originally appeared on 2024-03-07.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2024/irs-announces-new-initiative-aimed-at-high-income-non-filers.html
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Insero & Co. CPAs, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how Insero & Co. CPAs can assist you, please call (800) 232-9547.
