You Haven't Filed Your Tax Returns in Recent Years? The IRS is Coming.

IRS | Taxes | Delinquency | Penalty | November 13, 2024

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The Internal Revenue Service is turning up the heat on high-income individuals who haven’t filed tax returns in some years.

Early this year, the IRS began sending compliance letters to people who made $400,000 or more in years for which they didn’t file a return. Some of those people made $1 million or more. The IRS recommends either filing those missing returns pronto, or explaining why you don’t need to do so.

“People receiving these letters should take immediate action to avoid additional follow-up notices, higher penalties as well as increasingly stronger enforcement measures,” the IRS warns. 

Some nonfilers making less than $400,000 “are also receiving notices, but the top priority is for people making more than that amount,” says Eric Smith, an IRS spokesman. 

“This is the IRS’s gentle tap on the shoulder. The next tap could be much harder,” says Caroline D. Ciraolo, a partner with the Kostelanetz law firm in its Washington, D.C., office and a former acting assistant attorney general of the Justice Department’s tax division.

Who this affects

The IRS says it compiled its high-earner list based on cases in which it received documents, such as a W-2 or 1099, reporting income for an individual from that person’s employer, financial companies or other institutions and where the IRS doesn’t have returns for that person for those years. This nonfiler initiative is focused on missing returns for tax years between 2017 and 2021.

The exact amount in unpaid taxes isn’t known because the IRS doesn’t know what deductions, credits, exclusions or other breaks those high earners might be able to claim. It is possible some of them might not owe anything. But a “conservative estimate” puts the number in “hundreds of millions of dollars,” the IRS says.

Get help

When it comes to filing back taxes and making any payments due, there are options. Here are some things to consider.

• Hire a pro: Before filing past-due returns, consider hiring a tax professional for advice on “the various compliance paths,” Ciraolo says. That can include the intricacies of how to seek penalty relief, which can be surprisingly complex. Hire an experienced lawyer if you might be facing “potential criminal exposure,” she adds.

• How many years are involved: “There is no statute of limitations for an unfiled tax return,” says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. However, the IRS “typically does not go back more than six years,” Luscombe says.

Another IRS spokesman confirms that is the general policy, although there can be exceptions. “Taxpayers should file returns for all years for which they are due,” he says. “While enforcement of filing requirements will normally be pursued for a six-year period,” the IRS can go back further “when it determines it is appropriate to do so.” 

• You have payment options: Some people haven’t filed their tax returns for years because they can’t afford to pay what they owe and assume it is better to wait until they can. That is a recipe for disaster, says Eric L. Green, a tax lawyer at Green & Sklarz in New Haven, Conn. Instead, people should look into paying what they can and then apply for a payment plan through the IRS to pay whatever else is owed over time, Green says. 

• Negotiate the amount owed: You can ask the IRS to accept less than you owe by making an “offer in compromise,” Green says. This can be successful, for example, if someone can convince the IRS that the amount offered is the most that the government can expect to collect within a certain period—or if someone can demonstrate that paying would cause a financial hardship, or would be unfair because of "exceptional circumstances."

To see if you’re eligible for this type of approach, check out the IRS’s offer-in-compromise pre-qualifier tool. Keep in mind that it is typically very difficult to get the IRS to compromise, and the process can be time-consuming. In addition, the IRS says it generally won’t accept an offer if it determines that you can pay everything you owe through an installment agreement or equity in assets. 

Before hiring a pro to help navigate the offer-in-compromise maze, check out that person’s background and expertise as carefully as possible. Earlier this year, the IRS renewed warnings about “pricey” offer-in-compromise “mills” that “aggressively mislead taxpayers into thinking their tax debts can disappear.” Although offer in compromise is “a legitimate IRS program,” the IRS says “many taxpayers do not meet the technical requirements for the tax resolution program, often leaving them facing excessive fees from the promoters for information they could have easily obtained for free” by using the IRS’s pre-qualifier tool and by exploring details on the IRS site.

• Seek penalty relief: Some nonfilers may be able to get certain penalties removed or reduced—for example, if they can show they have acted with “reasonable cause” and “in good faith.” IRS decisions rest on the facts and circumstances of each case. Circumstances that might yield a favorable decision may include a serious illness, death in the family, inability to get records, and fires, natural disasters or civil disturbances.

The IRS “will look closely at the nature of the event, whether the taxpayer was able to manage other matters during this time, and how quickly the taxpayer addressed the failure to file after the event subsided,” Ciraolo says.

Another way to qualify for penalty relief is the IRS’s “first-time-abate” policy, Green says. Generally, that means you may qualify for relief “if it’s your first tax penalty” within a certain period, or if you meet other criteria allowed by law, the IRS says.

If you can’t resolve penalty issues on your own and think you have a strong case, consider contacting the IRS Taxpayer Advocate Service, an independent unit within the IRS. It has offices in many cities.

Lastly, never argue that federal income-tax laws are somehow “voluntary” or unconstitutional. Courts have routinely rejected these and similar arguments and have imposed stiff penalties for “frivolous” claims. This is a good way to grab the IRS’s attention and face criminal prosecution. 

 Credit goes to Tom Herman, published in the Wall Street Journal on August 11, 2024
 
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This Week’s Author, Mark Bradstreet