The IRS is mailing compliance letters, known as CP59 notices, “on more than 125,000 cases where tax returns haven’t been filed since 2017.”
According to the IRS, the mailings are being sent to more than 25,000 people who have more than $1 million in income between tax years 2017 and 2021, and to more than 100,000 people who have incomes between $400,000 and $1 million during that time span.
The common factor for these cases? They involve the IRS receiving “third-party information” — for example, W-2 and 1099 forms — that indicated “these people received income in these ranges but failed to file a tax return.” The third-party information also indicates the taxpayers had financial activity of more than $100 billion, according to the IRS, which added that a conservative estimate points to “hundreds of millions of dollars of unpaid taxes are involved in these cases.”
The passage of the Inflation Reduction Act of 2022 provided additional funding for the IRS to pursue these cases. According to the IRS, the non-filer program had “only run sporadically since 2016 due to severe budget and staff limitations that didn’t allow these cases to be worked.”
If those who receive a CP59 notice fail to respond, the IRS has a number of options, including filing a Substitute for Return, in which the IRS “calculates this substitute tax return based on wages and other income reported to the agency by employers, financial institutions and others. The return factors in the tax, penalty and interest owed by the taxpayer.”
The IRS notes that such a return might not give a taxpayer credit “for deductions and exemptions they may be entitled to receive because the IRS does not know each taxpayer’s situation.” The IRS will send CP3219N, also known as a Notice of Deficiency. The notice will propose a tax assessment and give the taxpayer 90 days to file a past-due tax return or file a petition in Tax Court. If the taxpayer does not do either, then the IRS “will proceed with the proposed assessment.”
If a tax bill remains unpaid after the IRS prepares a tax return, it will lead to a collection process, which can include a levy on wages or a notice of a federal tax lien.
If you receive a CP59 notice, you will want to consult your tax adviser on your next steps. If you have filed a tax return for the year in question in the CP59 notice, you can file Form 15103, Form 1040 Return Delinquency, to explain your circumstances.
Keep in mind that if you did not file a return by the due date, you face a possible “failure-to-file” penalty, which is “5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes.”
The CP59 cases cited earlier are part of new initiatives for the IRS, including expanding “enforcement efforts related to high-income individuals, large corporations and complex partnerships.” The IRS is pursing “millionaires that have not paid hundreds of millions of dollars in tax debt,” adding that it had “collected $482 million in ongoing efforts to recoup taxes owed by 1,600 millionaires with work continuing in this area.” The IRS is also conducting audits of more than 75 of the largest partnerships, which include hedge funds, real estate investment partnerships, publicly traded partnerships and large law firms, using artificial intelligence.
Russell L. Abrahms, CPA, of a firm located in Fairfield, Connecticut, gave some suggestions to help taxpayers avoid CP59 issues: retain e-file confirmation form 9325 from your tax preparer; if you paper file, use a certified mail return receipt; keep copies of tax returns filed along with supporting documentation; if the IRS issued an identity protection number, you need to provide it to your tax preparer, otherwise the e-file will be rejected – it is the same as not filing.
Abrahms also provides a reminder that “taxpayers may have reasons for not filing and penalty abatement procedures are available, especially for illness, loss of documents due to fire, tragedies, etc.”