Insights

IRS Launches Non-Filer Initiative for High-Income Individuals

By Tara Seymour, CPA, Partner

The IRS recently announced a non-filer initiative aimed at high-income individuals who the IRS believes have not filed tax returns over the past several years. Read on for details on this initiative and recommendations from PKF O’Connor Davies.

The Initiative

The initiative, funded by the Inflation Reduction Act (IRA), started with the IRS mailing out compliance letters in more than 125,000 cases where tax returns have not been filed for the years between 2017 and 2021. The initial round of mailings will include more than 25,000 letters to individuals with more than $1 million in income and over 100,000 letters to those with an income of $400,000 to $1 million between 2017 and 2021.

This initiative is part of a larger one to ensure that large corporations, partnerships and high-income individuals pay their tax liabilities. Before the IRA, budget cuts prevented the IRS from sufficient enforcement action to ensure that high-income taxpayers complied with the tax laws and did not manipulate their income to avoid paying taxes. 

While the IRS receives income amounts from third parties on various tax forms, such as W-2s and 1099s, it does not receive information regarding potential credits and deductions to which the taxpayer may be entitled. Therefore, it is difficult to determine the potential revenue generated from this initiative. However, the IRS expects the unpaid taxes to amount to hundreds of millions of dollars in these cases.

What should you do if you receive one of these letters?

If you receive one of these compliance letters, we recommend that you consult a trusted tax professional who can help you prepare and file the past-due returns quickly and pay any delinquent taxes, interest and penalties. The failure-to-file penalty is significant – 5% of the amount due every month to a maximum of 25% of the taxes owed. Furthermore, if an individual fails to file a return, the IRS can file a Substitute for Return (SFR), which calculates the tax based on the income reported to the IRS but does not consider any deductions or credits to which the taxpayer may be entitled. If the IRS completes an SFR for a taxpayer, the taxpayer has limited time to respond and challenge. Therefore, it is in the taxpayer’s best interest to file the deficient returns quickly if they receive a letter.

PKFOD Observation: The initiative covers taxpayers for whom the IRS does not have a record of filing a return. The time covered by the initiative includes the 2019, 2020 and 2021 tax years, all of which had filing periods impacted by the COVID pandemic. During this time, the IRS has admitted to having significant issues processing paper returns. Thus, it’s possible a taxpayer could receive a letter despite filing a return if the return was paper filed. In such an instance, we recommend contacting the IRS with proof of the original filing and a copy of the return.

To read the IRS announcement, click here.

    Contact Us

    If you receive one of these notices and need assistance, our tax professionals at PKF O’Connor Davies can help you navigate the filings and ensure that you comply with the tax laws. Please contact your client tax team or:

    Tara Seymour, CPA
    Partner
    tseymour@pkfod.com | 201.639.5738