IRS turns to wealthy non-filers in push to get more tax dollars

The IRS said it expects to get hundreds of millions of dollars from high-income people who haven’t filed federal income tax returns under a new initiative in the agency’s fight to get the money it’s owed from wealthy taxpayers.

The agency is using letters to target 125,000 cases of taxpayers with incomes of more than $400,000 who didn’t file returns between the years 2017 and 2021, according to a Thursday announcement. Letters to non-filers are set to go out this week.

The IRS called the hundreds of millions of dollars expected a “conservative estimate.” The taxpayers targeted have an economic activity of more than $100 billion, according to the agency.

The IRS is broadly focused on closing the tax gap, or the difference between what is owed and what is paid, by targeting high-net-worth individuals. The Democrats’ tax-and-climate law provided tens of billions of dollars in funds to the agency, which allowed for increased enforcement efforts. Large partnerships and corporate jet users are other areas where the IRS is looking to recoup the money it is owed.

About 25,000 non-filer cases targeted in this campaign involve incomes of more than $1 million. The IRS has W-2 and 1099 forms from third parties that note who these high-income non-filers are. About 20,000 to 40,000 letters are set to go out each week, beginning with the highest earners, the IRS said.

People who don’t comply with the IRS’s initial CP-59 notices will receive follow-up notices and higher penalties, in addition to owing interest. For people who continue to not file, the IRS can file a substitute return based on income and won’t include deductions or exemptions that it doesn’t know. Criminal prosecution is also a possibility for continued noncompliance.

IRS Commissioner Danny Werfel said during a press call that the agency had to rebuild its capacity to institute compliance efforts on non-filers after the pandemic. The IRS resumed automated collection notices at the end of last year after an almost two-year pause because of a processing backlog and lack of staff.

The agency now has more than 5,000 new customer service and account managers, hired through the 2022 funding, Werfel said.

The difference between this non-filer effort and those in the past is the emphasis on high-income people, Werfel said. For people with income lower than $400,000, the IRS is more focused on helping them file returns because they are more likely eligible for a refund, he said.

“We’re going to use all the enforcement dollars enacted under the Inflation Reduction Act to increase scrutiny on those earning more than $400,000,” Werfel said.