IRS to Retrieve Potentially Hundreds of Millions of Dollars From Americans Who Failed to File Tax Returns

The Internal Revenue Service (IRS) building in Washington, on June 28, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) announced a new effort aimed at boosting tax revenue from taxpayers who haven’t filed returns for several years, with the initiative expected to net at least hundreds of millions of dollars.

The new initiative, announced on Feb. 29, focuses on 125,000 cases of taxpayers with annual incomes over $400,000 who didn’t file tax returns between 2017 and 2021.

The IRS said it was tipped off by various types of third-party information indicating that these taxpayers received taxable income but failed to file a tax return.

Information on these taxpayers indicates total financial activity of over $100 billion.

“Even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases,” the agency said in a statement.

The IRS will soon start sending letters (known as CP59 notices) to the affected taxpayers at a rate of between 20,000–40,000 per week.

The agency warned that people who receive these letters should take immediate action to avoid higher penalties and “increasingly stronger enforcement measures.”

The penalty of failure to pay is 5 percent of the amount owed each month, up to a maximum of 25 percent of the tax bill.

‘Risk Will Just Grow’

Roughly 25,000 cases involve taxpayers who made over $1 million in income, while around 100,000 pertain to non-filers with incomes between $400,000 and $1 million.

In all cases, the IRS was tipped off by way of third-party information, including through Forms W-2 and 1099s, that these people received incomes within the above ranges between tax years 2017 and 2021.

Some of these non-filers have multiple years included in each case, so the total number of taxpayers targeted by the new initiative will be smaller than the roughly 125,000 letters that will be sent out.

“We cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return,” IRS Commissioner Danny Werfel said in a statement.

“For those who owe, the risk will just grow over time as will the potential for penalties and interest,” he added.

The latest move is part of a broader IRS effort to ramp up tax enforcement thanks to a $60 billion funding boost from the Inflation Reduction Act.

While the IRS has vowed to spare Americans earning less than $400,000 from its enforcement crackdown, a watchdog has cast doubt on the agency’s ability to make good on this pledge.

New Compliance Crackdown

The IRS announced four new initiatives in October that target high-income, high-wealth individuals, as well as large corporations.

One of these thrusts is focused on U.S. subsidiaries of foreign companies that distribute goods in the United States but don’t pay enough tax.

“These foreign companies report losses or exceedingly low margins year after year through the improper use of transfer pricing to avoid reporting an appropriate amount of U.S. profits,” the agency said in a statement.

The second initiative relates to the IRS Large Business & International Division’s (LB&I) Large Corporate Compliance (LCC) arm, which is being expanded and will be auditing an additional 60 big corporations with assets worth over $24 billion on average.

The third initiative involves cracking down on abuse of a corporate tax break that was repealed several years ago, while the fourth targets individual taxpayers who make over $1 million in annual income and have over $250,000 in recognized tax debts.

While the IRS has repeated time and again that it’s new enforcement crackdown won’t target Americans earning less than $400,000, a watchdog has cast doubt on this pledge and the agency’s chief hinted that this might inadvertently happen.

The Treasury Inspector General for Tax Administration (TIGTA), which is the watchdog overseeing the IRS, said in a September report that the IRS would have a hard time making good on its $400,000 pledge because the agency doesn’t have a clear definition of “high income” and many of its tax enforcers still use an outdated $200,000 threshold as their default.

Mr. Werfel said in recent testimony on Capitol Hill that his “marching order to the IRS” is not to increase audit rates for people making less than $400,000, but added that, “if we fall short of that, I will be held accountable,” hinting that even with the best intentions, there’s a chance overzealous enforcers might do so anyway.

A separate watchdog report revealed that the IRS managed to rake in a record $4.9 trillion in taxes from Americans in the last fiscal year, in large part due to automated collections processes and aggressive audits.

While the IRS is set to continue increasing its reliance on automated systems to squeeze more tax dollars from American taxpayers, it’s also looking to hire another 3,700 tax enforcers as it spends an extra $46 billion of the recent $60 billion funding boost on enforcement.