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New IRS Initiative Targets Tax-Return Non-Filers

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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.

Photo credit: Flickr

IRS Warns Thousands Could Face Criminal Charges for Filing False Returns

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The IRS warned on Tuesday that thousands of taxpayers could face criminal prosecution if they filed false tax returns for high refunds.

In a press release, the IRS reiterated a warning not to fall for tax scams centered around the Fuel Tax Credit, Sick and Family Credit, and household employment taxes.

Despite the warnings, the IRS reportedly came across thousands of dubious claims from taxpayers for credits for which they were not eligible. As a result, the IRS has delayed the refunds and is requesting the taxpayers under investigation to provide proof they are eligible for the credits.

“Scam artists and social media posts have perpetuated a number of false and misleading claims that have tricked well-meaning taxpayers into believing they’re entitled to big, windfall tax refunds,” IRS Commissioner Danny Werfel said. “These bad claims have been caught during our fraud review process. Taxpayers who filed these claims should realize they’ve been tricked, and they face an extensive review process and a long potential wait if they’re owed a refund for other things.”

The Fuel Tax Credit is designed for off-highway business and farming use, the IRS said, and taxpayers who claim the credit are required to have a business purpose and qualifying business activity, like running a farm or purchasing gasoline for aviation purposes. (Read more from “IRS Warns Thousands Could Face Criminal Charges for Filing False Returns” HERE)

The IRS Says Audits Are About to Surge — Here’s Who’s Most at Risk

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The Internal Revenue Service said it plans to sharply increase audit rates for big corporations, partnerships and multimillionaires over the next three years after a massive boost in funding by the Biden administration.

The IRS said in a news release Thursday that it’s aiming to nearly triple its audit rate, to 22.6%, on corporations with upwards of $250 million worth of assets in the 2026 tax year. . .

For complex partnerships with assets topping $10 million, the IRS said it intends to increase audit rates nearly 10-fold, to 1% in tax year 2026 — up from 0.1% in 2019.

The IRS also said it is targeting a 50% increase in audit rates for individuals with a total positive annual income exceeding $10 million. . .

At the same time, the IRS assured that it would not increase audit rates on individuals and small businesses earning under $400,000, in keeping with President Biden’s pledge not to increase taxes on that population. (Read more from “The IRS Says Audits Are About to Surge — Here’s Who’s Most at Risk” HERE)

IRS Official Exposes Controversial Practices: ‘No Problem Going after the Small People, Putting People in Prison, and Destroying People’s Lives’

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In a shocking revelation, an IRS official, Alex Mena, employed in “Criminal Investigations,” has brought to light controversial statements and concerns about the Internal Revenue Service’s practices. The undercover footage, obtained by an O’Keefe Media citizen journalist, reveals Mena expressing unsettling perspectives on IRS operations.

Mena candidly stated that the IRS “has no problem going after the small people, putting people in prison, and destroying people’s lives.”

Of particular concern is Mena’s doubt regarding the constitutionality of the IRS utilizing artificial intelligence (AI) to access everyone’s bank accounts nationwide. The potential use of AI for mass surveillance by a government agency has sparked debates over privacy and civil liberties.

The footage captured Mena recounting statements from IRS agents, suggesting a callous attitude towards their actions. He mentioned agents stating, “…the first person you shoot you’re gonna remember, but after that you’re gonna shoot like a hundred people, you’re not gonna remember any of them.”

Mena goes on to describe IRS agents as “assholes,” using strong language to emphasize what he perceives as a pervasive issue within the agency.

Man Who Leaked Trump Tax Returns Sentenced to 5 Years in Prison

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A former IRS contractor who leaked the tax returns of several wealthy and powerful individuals, including former President Donald Trump, was sentenced to five years in prison this week.

The U.S. Department of Justice announced criminal charges last September against 38-year-old Charles Edward Littlejohn, who was a contractor with the IRS from 2018 to 2020. Littlejohn pled guilty in October 2023 to unauthorized disclosure of tax returns and return information.

As a government contractor, Littlejohn “stole” Trump’s tax return information, the DOJ said on Monday, adding that he took steps to conceal his activities so he wouldn’t get caught. He also stole the tax return information of thousands of America’s wealthiest individuals, including figures like Jeff Bezos.

Judge Ana Reyes, a Biden nominee, imposed the maximum sentence on Littlejohn in federal court and compared him to those who participated in the January 6, 2021, riot at the U.S. Capitol. (Read more from “Man Who Leaked Trump Tax Returns Sentenced to 5 Years in Prison” HERE)

Photo credit: Gage Skidmore via Flickr

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The IRS and the ERC Mess

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Congress created the Employee Retention Credit (ERC) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. The CARES Act was one of six pieces of federal legislation enacted between March 2020 and the end of 2021 designed to spend America out of the economic disaster that arose from Covid-19 and, perhaps even more so, the shutdown orders that were issued (with few exceptions) throughout the United States.

The ERC is found in Internal Revenue Code Section 3134. It was designed to provide an incentive for employers to keep their employees on the payroll, even if they were not working. The ERC is a refundable credit against employment taxes owed by employers. The law allows employers to obtain a credit of up to $7,000 per employee per quarter (capped at $21,000).

Recently, the IRS sounded the alarm concerning potentially bogus ERC claims. In July 2023, the IRS issued a news release claiming that it was looking more closely at all ERC claims. The agency is increasingly concerned that marketing by firms overstating ERC eligibility is leading to “businesses filing dubious claims.” In that news release, Commissioner Werfel stated:

The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining. Instead, we continue to see more and more questionable claims coming in following the onslaught of misleading marketing from promoters pushing businesses to apply. To address this, the IRS continues to intensify our compliance work in this area.

There was always a clear risk that this could happen. Refundable credits have long been the bane of our tax system. People wonder why the IRS targets low-income citizens for audits at a high rate. The reason is that low-income citizens are the ones who claim the earned-income tax credit (EITC). This is also a refundable credit, allowing certain low-income citizens to get more money back from the government than they paid to begin with. The Office of Management and Budget has dubbed the EITC a high-risk program because of the level of fraud associated with it.

Interestingly, the IRS does not specifically identify the nature of the ERC fraud in question. However, later news releases (discussed below) indicate that marketing companies, not tax professionals, are submitting claims for businesses that don’t qualify for the credit. To be sure, after Congress created code Section 3134 in March 2020, the law went through three amendments between then and November of 2021, at which time it was repealed retroactively, except for certain exceptions. This has created what the IRS acknowledges to be a very “complex credit with precise requirements.”

Yet complexity does not excuse the filing of a deliberately false claim, which constitutes a potential felony offense, and at the very least, carries civil penalties and interest on any required payback. It does, however, explain why taxpayers by the millions are driven into the waiting arms of professional hustlers who take advantage of the complexity of the system and the ignorance of citizens.

In September, the IRS announced an immediate moratorium through at least the end of 2023 on processing ERC claims. In issuing the moratorium, Commissioner Werfel stated:

The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in. The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.

Werfel went on to say that:

businesses should seek out a trusted tax professional who actually understands the complex ERC rules, not a promoter or marketer hustling to get a hefty contingency fee. Businesses that receive ERC payments improperly face the daunting prospect of paying those back, so we urge the utmost caution. The moratorium will help protect taxpayers by adding a new safety net onto this program to focus on fraudulent claims and scammers taking advantage of honest taxpayers.

The IRS will continue to work claims filed prior to September 14, but it is expected that the processing time will at least double, from 90 to 180 days, and perhaps become even longer if the claim faces future review or audit. The September news release also stated that the IRS would provide guidance on how businesses may actually withdraw erroneous ERC claims without facing penalties.

That procedure was just announced. Commissioner Werfel stated:

The IRS is committed to helping small businesses and others caught up in this onslaught of Employee Retention Credit marketing. The aggressive marketing of these schemes has harmed well-meaning businesses and organizations, and some are having second thoughts about their claims. We want to give these taxpayers a way out. The withdrawal option allows employers with pending claims to avoid future problems, and we encourage them to closely review the withdrawal option and the requirements. We continue to urge taxpayers to consult with a trusted tax professional rather than a marketing company about this complex tax credit.

Note that the IRS is clear regarding deliberately bogus claims. In the September news release, the agency claims that “hundreds of criminal cases are being worked and thousands of ERC claims have been referred for audit.” The IRS goes on to say that, “Those who have willfully filed fraudulent claims or conspired to do so should be aware, however, that withdrawing a fraudulent claim will not exempt them from potential criminal investigation and prosecution.” The IRS is currently working with the Justice Department to bring cases against egregious ERC claims and promoters “who have been ignoring the rules and pushing businesses to apply.”

To illustrate that the IRS means business, the agency announced in early December that it was issuing the first round of more than 20,000 letters to businesses denying their ERC claims. The letters are going to businesses that either didn’t exist during the eligibility periods or did not have paid employees during such periods. Such businesses are what the IRS refers to as “a large block of taxpayers” who don’t qualify for the credit. Upon disallowance of the credit, the IRS will seek repayment of all improper refunds.

The key in all this, according to Werfel, is to consult “a trusted tax professional” to address potential issues. If you’re concerned about an ERC claim, consult a tax professional — not a marketing company — with experience in ERC claims as soon as possible.

Author’s note: Nothing in this article should be construed as constituting tax advice, which can be given only by a qualified professional after full and accurate disclosure of all relevant facts.

(For more from the author of “The IRS and the ERC Mess” click HERE)

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IRS Whistleblowers: Joe Biden Leads ‘Off the Table’ in Hunter Biden Investigation

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New testimony from IRS whistleblowers, Gary Shapley and Joseph Ziegler, reveals that during the Department of Justice’s criminal investigation into Hunter Biden, any potential investigative leads involving Joe Biden were deliberately excluded. The testimony, presented before the House Ways and Means Committee, discloses that the agents were prohibited from exploring leads that could have implications for the former Vice President.

Ziegler, responding to questioning from Republican Georgia Rep. Drew Ferguson, stated, “Well, that’s the complex part about this is at the end of the day, any questions that might have led to former Vice President, they were kind of off the table.” Shapley echoed this sentiment, emphasizing the limitations imposed on investigating financial transactions and communications between Hunter Biden and Joe Biden.

The IRS whistleblowers expressed frustration over their inability to pursue leads related to Joe Biden, citing the unusual nature of the investigative process. Shapley specifically referenced the infamous “10 held by H for the big guy” remark from Hunter Biden’s associate, James Gilliar, stating that such leads, which could have provided insights into financial transactions between father and son, were not allowed to be investigated.

The testimony from the IRS whistleblowers aligns with previous allegations of special treatment given to Hunter Biden during the DOJ investigation into taxes and firearms possession. The House Republicans’ report on December 5 substantiates key claims made by the whistleblowers.

Assistant U.S. Attorney Lesley Wolf attempted to prevent Joe Biden from being included in a search warrant related to lobbying firm Blue Star Strategies. Documents released by the Ways and Means Committee in September reveal instructions to remove “political figure 1,” identified as Joe Biden, from the search warrant.

Photo credit: Gage Skidmore via Flickr

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IRS Doubles Penalty for this Common Mistake

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The Internal Revenue Service penalty for tax underpayments has nearly tripled since 2021, putting gig economy workers and consultants at the largest risk of having to cough up big bucks to Uncle Sam.

As of Oct. 1, the IRS will now charge 8% interest on estimated tax underpayments, up from 3% two years ago, according to The Wall Street Journal.

The penalties are largely applied to pay-as-you-go workers who do not have taxes withheld and fail to make estimated quarterly payments before filing their taxes in April.

Workers who do have taxes withheld would still be hit with the new higher penalty if they don’t accurately calculate and pay taxes on any additional income, as would people earning higher-than-expected dividend payments.

Karla Dennis, a La Palma, Calif., enrolled agent, said taxpayers who change their withholding to get more weekly cash could also run into trouble. (Read more from “IRS Doubles Penalty for this Common Mistake” HERE)

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Top Hunter Biden Prosecutor Confirms Key Detail of IRS Whistleblower Testimony, Jim Jordan Says

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Delaware U.S. Attorney David Weiss, special counsel in the ongoing Hunter Biden investigation, confirmed a key allegation made by IRS whistleblower Gary Shapley, Republican Ohio Rep. Jim Jordan said Tuesday.

Weiss testified before the House Judiciary Committee on Tuesday and said he requested special attorney authority under section 515 in the spring of 2022, Judiciary Committee chairman Jim Jordan told reporters. Weiss was not given the special attorney authority and did not have special attorney authority before his special counsel appointment in August, Jordan said.

“When he was specifically asked, did you ever request special attorney authority under Section 515, Mr. Weiss’s response was yes, in the spring of 2022. So that that goes to the heart of the matter,” Jordan stated.

“So to me, that’s the key takeaway. He won’t answer a lot of questions. But that’s the key takeaway, because this whole deposition was about the changing story we got from DOJ, regarding the authority that he had,” he continued. (Read more from “Top Hunter Biden Prosecutor Confirms Key Detail of IRS Whistleblower Testimony, Jim Jordan Says” HERE)

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IRS Misled Taxpayers in Surveys and Made up Cost Estimates for New Filing Initiative, Watchdog Report Finds

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The IRS misled taxpayers in surveys and generated unsubstantiated cost and user estimates for a new direct online tax filing initiative, a new watchdog report concluded.

The U.S. Treasury Inspector General for Tax Administration (TIGTA) released a report on Oct. 2 assessing the IRS’s plan for a free e-filing system and the TIGTA concluded that the IRS misled taxpayers in surveys about the e-file system and failed to produce data to justify its cost and user estimates.

“The IRS obtained taxpayer opinions on a Direct File system. However, taxpayer interest in a Direct File tool may be overstated due to the design of the surveys conducted,” the report states. “In addition, the survey prompt may have led taxpayers to believe that the tool would have more options than it will immediately have available, such as the ability to file State tax returns.”

“Finally, the IRS could not provide TIGTA with any supporting documentation to support its cost estimates or how it determined there would be at least 5 million users. As a result, TIGTA had no way to identify the reasonableness of the IRS’s cost estimates,” the report adds. (Read more from “IRS Misled Taxpayers in Surveys and Made up Cost Estimates for New Filing Initiative, Watchdog Report Finds” HERE)

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