Each year, millions of citizens required to file tax returns fail to do so. According to a 2020 analysis by the Treasury Inspector General for Tax Administration (TIGTA), the number of suspected tax-return non-filers grew from approximately 7.5 million in 2010 to nearly 11 million in 2016. I can only assume the numbers are much higher now, given the economic grief the nation has suffered since March 2020.

The IRS identifies non-filers primarily by third-party income reports filed with the agency. The most common reports are Forms W-2 showing wage income, Forms 1099 showing miscellaneous income, and similar documents reporting such things as interest and dividends. The IRS compares the Social Security numbers in these reports with its database of filed tax returns. When data show, say, income reported on a Form W-2, but no corresponding tax return, the agency assumes that person is a non-filer. The IRS also identifies potential non-filers by analyzing their prior-year filing histories. For example, suppose a person filed a return in 2022 reporting $100,000 of wage income. It is presumed that such person is also required to file in 2023, and is likely to have earned the same or similar income.

Of course, not every person who fails to file a return is required to file. Code sections 6001, 6011, 6012, and 6017 generally control the question of who’s required to file. The requirement to file a return is driven by the receipt of income, not the question of whether one actually owes tax. One’s income must exceed a certain threshold (depending generally on filing status) before the obligation to file is triggered. Moreover, just because one was required to file in a past year does not itself mean he will be required to file in subsequent years. Each tax year’s filing and payment obligations are controlled solely by the facts and circumstances of that particular year.

The Failure to File May Be Criminal

The failure to file a tax return can be a criminal act, subject to potential fines and jail time. Code section 7203 makes the willful failure to file a return a misdemeanor. However, in a failure-to-file case, the IRS must prove beyond a reasonable doubt that the accused was legally required to file and willfully failed to do so. That is, there must be proof beyond a reasonable doubt that the failure to file was a voluntary, intentional act carried out specifically for the purposes of violating the law. This essential element of willfulness makes proving a criminal tax case very difficult.

Most Non-Filer Cases Are Civil

Because of the strict burden of proof required in criminal cases, most non-filer cases are purely civil. In civil cases, the IRS works to secure the delinquent returns, or otherwise makes a tax assessment based on available information. It then sets out to collect the assessment. In a civil case (unlike a criminal case), the burden of proof is on the taxpayer. With regard to an unfiled return, the taxpayer must prove that the return was filed or that no return was legally required. Otherwise, the taxpayer has the affirmative duty to report income and any deductible expenses allowed by law.

Short of that, the IRS uses its authority under code section 6020(b) to prepare a return for the non-filer. This is known as a Substitute for Return (SFR). Section 6020(b) reads as follows:

If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.

An SFR is generally based on income reports on file with the IRS. For example, if W-2s report wages of $100,000, the IRS issues an SFR showing $100,000 of income. It does so, however, without giving the taxpayer in question the benefit of any deductions, exemptions, or credits.

An SFR is not limited to just income reports. As the statute provides, it can be based on “such information” as is available. That might include Bureau of Labor statistics on income averages in the taxpayer’s area, income reported on prior years’ tax returns, or any other information the IRS may wish to employ. Note, however, that the IRS does bear a limited (but important) burden of proof where the issue of unreported income is concerned.

The Non-Filer Initiative

During the pandemic, the IRS became overwhelmed with up to 35 million unprocessed tax returns and incoming letters from taxpayers responding to IRS notices. As part of the plan to work out of the backlog, the agency stopped sending outgoing notices to taxpayers. As a result, non-filers no longer received notices explaining that they had a duty to file one or more missing tax returns. Beginning in January 2024, the IRS restarted its collection-notice machine and began sending millions of notices to taxpayers reminding them that they owe money to the IRS.

On February 29, 2024, the IRS announced a compliance initiative pointed directly at non-filers. Notice IR-2024-56 states that the IRS is targeting “high-income taxpayers who have filed to file income tax returns.” Using funding granted by the Inflation Reduction Act, the IRS claims to be mailing out approximately 125,000 notices to taxpayers who haven’t filed for one or more years. The “compliance alert” will be a CP59 notice.

The CP59 notice states that the IRS has information showing that you received income (such as from wages) during the period in question, and that it has no return on file for that year. The notice gives various options for responding. You can: a) explain that a return was already filed (and provide a copy); b) explain why you believe you aren’t required to file; or c) file the requested return by the due date provided in the notice. IRS Form 15103, Form 1040 Delinquency, can be used as a response to a CP59 notice.

Notice CP59 explains that penalties and interest continue to grow as long as the tax owed (if any) is not paid. Moreover, it also explains that the IRS may prepare an SFR if the taxpayer does not respond, and alerts the taxpayer to the potential of criminal prosecution for willful failure to file. The notice also asserts that the IRS may commence an audit covering the year(s) of the missing return(s).

Are ‘High-Income Earners’ the Only Targets?

Notice IR-2024-56 states that the target audience for this wave of notices is those earning more than $400,000 per year. In fact, it says that 100,000 of the first wave of notices will be addressed to those earning between $400,000 and $1 million between tax years 2017 and 2021, while another 25,000 notices will be addressed to those earning more than $1 million during that period.

The $400,000 “magic number” comes from the Biden administration’s claim that nobody earning less than $400,000 per year will be subject to the increased IRS enforcement actions enabled by the supplemental funding authorized in the Inflation Reduction Act. Later, former IRS commissioner Charles Rettig stated that the new enforcement initiatives would not be directed at those earning less than $400,000 annually at any greater rate than “historical levels.” This sounds good, but the problem is that small businesses and self-employed individuals, historically, are the targets of about 60 percent of all IRS enforcement. The remaining 40 percent fall in the other 14 or so categories of return filers, including large businesses, wage-earners, and investors.

Moreover, the vast majority of non-filers are not high-income taxpayers. As we know from TIGTA’s research (mentioned above), of the nearly 11 million non-filers in 2016, only 879,415 were considered “high-income.” That’s fewer than 10 percent of all non-filers identified by TIGTA. Even worse, TIGTA used the IRS’s long-standing definition of “high-income” to single out those 879,415 taxpayers.

What Is the IRS’s Definition of ‘High-Income’?

The IRS’s definition is found in its Internal Revenue Manual (IRM). This is the vast administrative handbook the agency uses to guide its employees in the various procedural tasks they must carry out to enforce and administer the tax code. Part 5 of the IRM deals with the collection process. Chapter 19 of part 5 discusses the process of dealing with non-filers. It should come as no surprise that the IRS has always made it a matter of high priority to “expedite case processing” in high-income non-filer cases. (See: IRM part 5.19.2.8.1 (11-06-2015)). Thus, it is nothing new that the IRS is now chasing high-income citizens who have not filed tax returns.

But what may surprise some people is how the IRS defines a “high-income taxpayer.” Per the IRM section referenced above, a “high-income taxpayer” is any person, based on income reports received by the IRS (W-2s and 1099s), with income of “$100,000 and over.”

Based on the number of non-filers (nearly 11 million) identified by TIGTA, and the fact that the IRS has historically labeled high-income taxpayers as those earning at least $100,000 (not $400,000), it is inconceivable to believe that the IRS will only target those making over $400,000 and leave the rest alone. Even using the $100,000 threshold, fewer than 10 percent of the known non-filers fall into the “high-income” definition. Since the IRS mailed just 125,000 notices (with multiple notices going to some taxpayers), barely 1 percent of the known non-filers are being targeted by the current initiative.

But that’s not going to remain the case. As the IRS ramps up this process and restores its automated systems to the pre-pandemic status quo, there is no question in my mind that it will soon turn its attention to the broader universe of non-filers whose incomes fall well under the $400,000 threshold.

Make no mistake about it: The IRS will target the non-filers identified through information returns with its notice CP59. If you are one of these people, you should, as Commissioner Werfel suggests in notice IR-2024-56, “consult with a trusted tax professional so [you] can quickly file [your] late returns.” You then need to make arrangements to pay the tax you owe, or work to negotiate some other resolution. (For more from the author of “New IRS Initiative Targets Tax-Return Non-Filers” please click HERE)

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DANIEL J. PILLA is a tax-litigation specialist and the author of 15 books.

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