More than 125,000 high income individuals, who have abstained from filing federal tax returns since 2017, will receive letters urging them to file or provide explanations for their non-filing status, stated the IRS earlier this year.
The letters are being sent to over 25,000 individuals with incomes surpassing $1 million and to over 100,000 individuals with earnings ranging between $400,000 and $1 million. These correspondences target instances where high-income earners neglected to file returns during the tax years 2017 through 2021, based on third-party data like Forms W-2 and 1099s, signaling income within these brackets, the IRS clarified.
Though this renewed initiative, the IRS announced that the nonfiler program had operated intermittently since 2016 due to substantial budget cuts and staff shortages. Funding allocated by Congress through the Inflation Reduction Act of 2022, P.L. 117-169, facilitated its reactivation, as per IRS Commissioner Danny Werfel.
Werfel emphasized, “The IRS has been aware of these cases, involving well-off households, but lacked the manpower or resources to pursue them, which demand considerable time and workforce.”
Third-party data on nonfilers indicates economic activity exceeding $100 billion, with the IRS unsure of applicable credits and deductions. Conservatively estimated, the IRS believes unpaid taxes could amount to hundreds of millions of dollars.
Compliance alerts for failure to file, formally called CP59 Notice, will commence mailing in March 2024, with 20,000 to 40,000 letters dispatched weekly, prioritizing the highest income categories, Werfel announced.
Typically, nonfilers will have eight weeks to respond, with failure to do so potentially leading to collection, audit, and even criminal proceedings. The IRS may also file a substitute return (SFR) based on reported wages and income from employers, financial institutions, and others, factoring in tax, penalty, and interest owed by the taxpayer. The failure-to-file penalty accrues at 5% monthly, up to 25% of the tax bill.
Impacted taxpayers can expect tax bills from the IRS, triggering collection actions like wage or bank account levies or the filing of a federal tax lien notice. Repeated non-filing may invite additional penalties and/or criminal prosecution.