IRS Audits of High Income Nonfilers are Coming – Prepare Now
June 3, 2020 by Joshua Smeltzer
On April 1, 2020, the IRS suspended many enforcement actions as part of its People First Initiative. As part of the initiative, the IRS indicated it generally would not start new field, office and correspondence examinations until after July 15, 2020. However, with just over a month left on the suspension the Treasury Inspector General for Tax Administration (TIGTA) reports an almost $46 billion tax gap from high income nonfilers (i.e. over $100,000 in income). The study was conducted to assess whether the IRS is effectively addressing high-income nonfilers and the results are not entirely favorable. To the extent the IRS has enough personnel, it can be expected to start audits of these individuals again in mid-July.
Even before the COVID-19 pandemic was in full-force the IRS announced that it was making high-income non-filers a priority. For example, the IRS indicated that it would be making house-calls to encourage compliance. Now the TIGTA report puts a price-tag on the consequences of not pursuing the 879,415 high income nonfilers. Here are some things to consider if you or a client you advise has unfiled tax returns.
- Assess the problem. Perhaps an expected large tax bill caused the nonfiling. If so, it is important to know exactly how much is actually owed. The IRS can, and will, prepare a substitute for the unfiled return and everything will be interpreted to assess the most tax. High-income individuals should gather their documentation so they can assess the true amount owed or find someone who can help. Finding a qualified CPA or return preparer to review documents and provide you with a bottom line will help you plan. However, many return preparers are very busy and providing information early is in your best interest because you cannot fix a problem you do not fully understand.
- Assess any legal issues. Relying solely on your CPA or other financial advisor, at times, may be a reasonable option. However, in some cases the issues or amounts involved can mean the financial ruin of the individual and may warrant additional protections. Also, if there is a possibility of criminal investigation, the stakes could mean more than financial consequences. In these situations, it can be a devastating mistake not to seek the advice, and possibly representation, by a qualified tax lawyer. A tax lawyer offers additional confidentiality for sensitive issues, an independent evaluation of current tax positions, and the understanding and skill to argue any legal issues that may ultimately resolve the IRS examination.
- Consider an installment agreement. Once an amount is determined then options can be discussed – such as an installment agreement. The IRS will allow taxpayers to spread the amounts owed over a monthly payment plan that can extend, in some cases, as long as six years. Certain additions to tax (e.g. interest and penalties) may still apply until the full amount is paid but the IRS will generally forego enforced collection as long as there is no default of the agreement. The IRS requires a taxpayer seeking an installment to submit financial information on IRS Form 433-F or Forms 433-A and 433-B if the amount owed is particularly high.
- Offers in Compromise. If financial circumstances have changed such that an ability to pay the full amount owed is questionable then an Offer in Compromise (OIC) may be the best option. The taxpayer must convince the IRS that a reduced amount now is a better alternative to current collection of everything owed. Financial information will need to accompany the request, usually Forms 433-A and 433-B, to show an inability to pay and financial outlook supporting the request. The current pandemic has negatively impacted many taxpayers and a reasonable ability to pay back taxes may no longer be possible. An OIC may allow for a reduced payment of tax liabilities owed in exchange for avoiding enforced collection (i.e. liens and levies) while putting things back in order post-COVID-19.
Of course, every taxpayer’s situation is unique and a taxpayer must weigh a myriad of risks in disclosing and resolving past tax problems. If there are potential criminal implications, the tax problems are even more delicate and steps must be taken to protect confidential conversations. However, it is better to start assessing and handling any unfiled tax return problems now before the IRS comes calling.