This summer, the IRS will be escalating its efforts to address the mounting issue of non-filers, individuals who fail to submit their annual tax returns, posing a significant challenge to tax compliance and revenue collection. This escalation reflects a pressing need to enhance compliance and ensure that all eligible taxpayers contribute their fair share according to tax regulations. The significance of this initiative cannot be overstated, as it aims not only to recover lost revenue but also to maintain the integrity of the tax system, ensuring fairness and equity for all taxpayers. The increasing complexity of the tax code, combined with a lack of awareness about the importance of filing, has contributed to the growing problem of non-filers, making the IRS's focused intervention more critical than ever.
THE GROWING PROBLEM OF NON-FILERS
Historical Context
The IRS has battled the issue of non-filers for decades, with the financial impact significantly worsening. From $39 billion in unpaid taxes in 2016, the figure nearly doubled to $77 billion by 2021. This escalating problem prompted the IRS to intensify its focus, particularly on high-income earners who represent a substantial portion of this tax gap.
Current Data and Figures
In a recent initiative fueled by the Inflation Reduction Act, the IRS targeted over 125,000 high-income non-filers from tax years 2017 to 2021. Compliance letters were dispatched to more than 25,000 individuals with incomes exceeding $1 million, and to over 100,000 taxpayers with incomes between $400,000 and $1 million. This move aims to mitigate the growing discrepancy in tax compliance and recover substantial unpaid taxes.
Impacts on Tax Compliance
The failure of high-income earners to file tax returns not only affects revenue but also undermines the fairness of the tax system. The IRS has begun leveraging third-party data to identify and address these high-income non-filers. Immediate actions from these compliance efforts are essential to prevent further penalties and ensure that all taxpayers contribute their fair share to the nation’s fiscal health.
IRS’s RENEWED FOCUS ON NON-FILERS
Recent Initiatives
The Internal Revenue Service has launched a robust initiative targeting high-income taxpayers who have not filed federal income tax returns. This effort, funded by the Inflation Reduction Act, has enabled the IRS to send compliance letters to over 125,000 individuals. These targeted taxpayers include those with incomes between $400,000 and $1 million, and notably, more than 25,000 letters have been sent to individuals earning over $1 million.
Targeting High-Income Taxpayers
This renewed focus aims to address tax non-compliance among high-income earners who have historically been difficult to track due to the complexity of their financial activities. By leveraging third-party data, such as information from Forms W-2 and 1099s, the IRS can now more effectively identify and contact these high-income non-filers. The initiative underscores the IRS's commitment to ensuring fairness in the tax system by closing gaps in tax compliance.
Use of Technology and Resources
Significant advancements in technology and an increase in resources have bolstered the IRS's capabilities. The use of artificial intelligence to audit large partnerships and the strategic deployment of resources to recoup taxes from millionaires are part of these efforts. These actions not only enhance the efficiency of tax collection but also aim to recover substantial amounts of unpaid taxes, thereby supporting the overall integrity of the tax administration system.
CONSEQUENCES FOR NON_FILERS
Penalties and Interest
1. Failure to File and Pay Penalties: Taxpayers who do not file their returns or pay taxes owed by the due date incur significant penalties. The failure to file penalty is typically 5% of the unpaid taxes for each month or part of a month that a return is late, up to a maximum of 25%. Additionally, the failure to pay penalty is charged at 0.5% per month on any unpaid taxes.
2. Accumulation of Interest: Interest is charged on both unpaid taxes and penalties starting from the due date of the tax return until the balance is paid in full. The rate of interest varies depending on the type of penalty and can significantly increase the total amount owed.
Substitute for Return (SFR)
· IRS Filing on Behalf of Taxpayer: If a taxpayer fails to file a tax return, the IRS may file a substitute return. This substitute return does not include credits or deductions that the taxpayer may be entitled to, potentially leading to a higher tax liability.
· Opportunity to File a Correct Return: Taxpayers have the option to file their return even after an SFR has been issued, which may help them claim any deductions or credits they are entitled to and possibly reduce their tax liability.
Potential Criminal Prosecution
· Serious Consequences for Fraudulent Non-Filers: In cases where non-filing is accompanied by acts indicating fraud, the IRS may escalate the matter to criminal prosecution. Willful failure to file can lead to misdemeanor charges, and if accompanied by overt acts of evasion, it may be elevated to a felony.
· Civil and Criminal Penalties: Taxpayers found guilty of fraud face both civil penalties, such as the fraudulent failure to file (FFTF) penalty, and potential criminal charges, which can lead to imprisonment and fines. The civil fraud penalty is applicable to returns required after December 31, 1989, and is imposed to reinforce the seriousness of complying with tax filing laws.
STEPS NON-FILERS NEED TO TAKE
Responding to IRS Notices
When IRS non-filers receive a CP59 notice indicating that a tax return has not been filed, immediate action is required. They should either file their signed personal tax return promptly or complete Form 15103, Form 1040 Return Delinquency, explaining why the return is late, why it is not required, or confirming that it has already been filed. It is crucial to detach the notice stub and mail it along with the tax return and completed Form 15103 using the provided envelope. Alternatively, they can fax their information to the fax number listed in the notice.
Filing Past Due Returns
IRS non-filers should file all tax returns that are due, regardless of their ability to pay in full. This action limits interest charges and late payment penalties. If they are due a refund or eligible for tax credits like the Earned Income Credit, filing is essential to claim these benefits. For those who have received a notice, the past due return should be sent to the location indicated on the notice. If unable to pay the full amount owed, individuals can request an additional 60-120 days to pay or explore options like an installment agreement or an offer in compromise.
SEEKING PROFESSIONAL HELP
If you have been identified by the IRS as a non-filer, you may be facing difficulties with filing past due returns, and professional help can be invaluable. You may contact the IRS directly or seek assistance from a tax professional. At Lucrum Legal Accounting, we are here to help!
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