IRS Collection Notice Reboot Starts With Richest Scofflaws

The IRS’s newest campaign going after rich taxpayers who haven’t been filing returns is being hailed as a sign the agency is getting back on track after years of lags to make people pay the taxes they owe.

Decades of underfunding, processing delays and inadequate staffing led the agency to pause collection notices for almost two years. But IRS Commissioner Danny Werfel this week announced a new plan to send letters to thousands of high earners who haven’t filed their taxes. It’s the most recent effort in the IRS plan to use the 2022 tax-and-climate law funding to target wealthy people to close the tax gap, or the difference between tax money paid and owed.

Werfel said since about 2016 the agency didn’t have the staff to respond to people after sending non-file notices.

“We now have that internal capacity in the IRS to be able to both send the notices and then manage what happens after the notices go out,” Werfel said March 1 during an interview at the Federal Bar Association’s 2024 Tax Law Conference.

There are about 125,000 cases of non-filers who made over $400,000 between 2017 and 2021, the agency said. The IRS expects to get hundreds of millions of dollars in money owed. Letters to non-filers are set to go out this week.

“It’s good to see the IRS back on track,” said Bob Kerr, an enrolled agent who owns tax firm Kerr Consulting. “This isn’t a fishing expedition, as people say. The IRS knows these people exist.”

Tax practitioners expect those self-employed could account for the bulk of the non-filers. They may be people who say they were too busy or those who faced a life event that prevented them from filing, said Eric Green, partner at taxpayer representation firm Green & Sklarz LLC. Reports about the IRS not enforcing tax payments also deters filers.

“We have people who come in and haven’t filed in 10 years and shrug their shoulders and say, ‘I was busy,’” Green said.

Melissa Wiley, a tax partner at Lowenstein Sandler LLP, said it was surprising the IRS hadn’t been following up on non-filers, especially since the agency has had their information through 1099 and W-2 forms. A benefit of these forms is voluntary compliance because taxpayers feel they’ll be easily caught if they don’t comply, she said.

“It’s fairly shocking to learn how much noncompliance is out there among high earners who didn’t even bother to file tax returns, often for several years in a row,” Wiley said.

Big Pandemic Pause

The pandemic caused backlogs of paper returns and a timing disconnect to understanding whether someone had filed or not, Werfel said during the announcement last week.

“We fell so far behind in processing the basic tax returns that were coming in that we had to rebuild capacity to start something as basic as a non-filer program,” Werfel said.

The effort to go after wealthy people first is similar to previous IRS enforcement campaigns, now made easier with billions in funding from the 2022 tax-and-climate law. The agency also is increasing audits on large partnerships and corporate jet users. The $400,000 income threshold is in line with previous statements from President Joe Biden to not increase taxes on those making below that amount.

Werfel said the IRS plans to work with lower income non-filers, especially since those people are more likely to be eligible for refunds.

Kerr said he expects this announcement will be well received by most people who are following IRS rules.

“It’s the perfect way to turn back on the machines,” said Kerr, referring to the IRS’s historic underfunding.

Brett Bissonnette, a principal at Plante & Moran PLLC, said this IRS approach is more aggressive than in the past. For people who continue to neglect filing taxes after multiple notices, the IRS said it will file a substitute return based on income and won’t include deductions or exemptions that it doesn’t know. Criminal prosecution is also possible.

The IRS typically doesn’t use substitute returns for income tax returns, though it has been done in the past, Bissonnette said.

“It’s unusual for them to be that open about potentially doing it,” he said. “This shows the public they’re very serious.”