The IRS has started again to send the collection notices to taxpayers from late October. These notices were paused due to COVID-19. Now, the IRS’s mail backlog is caught up enough to enforce non-payments, and they will start levy, lien, and other threatening collection activities.
Before the pandemic, there were about 15 million taxpayers in the collection division inventory. On top of it, there are 10 million taxpayers who the IRS knew about but didn’t pursue. Due to the budget increase, the IRS was preparing to ramp up its enforcement of the collection process targeting non-filers, including in-person visits with its larger staff.
The IRS has slowed down in many aspects due to COVID-19, but they never stopped investigating people who haven’t filed tax returns. Pursuing non-filers can be one of the IRS’s most efficient enforcement strategies because issuing non-filer notices can be a cost-effective tool that requires little more than automated notices.
There is an ever-increased chance that the IRS will start ramping up their collection activities right after the presidential election is over.
Consequences of Non-Filing
Why are there so many non-filers? A significant number of people misunderstand and think, “If I don’t file, then the IRS won’t know. Then the IRS cannot pursue, lien, or levy me.” Or, “I didn’t get any notices the next year. I must’ve gotten away.”
However, this isn’t true. Taxpayers are only increasing their tax bills by not filing and waiting. The IRS will investigate and catch up with non-compliant cases in the following years. Once the IRS system discovers those cases, it will send out warning letters and threaten non-filers. Failure to file a tax return may be construed as a criminal act by the IRS and can be punishable by up to one year in jail for each year not filed. If left unresolved, the non-filers find themselves in a tough spot when the IRS freezes their bank accounts, garnishes their wages, seizes or sells their assets, suspends their passports, takes their retirement funds, takes their home, and so much more.
In addition, the IRS could identify many new non-filers thanks to the CARES Act that allowed the distribution of economic impact payment. The IRS created a separate portal for non-filers to file taxes, intended for non-filers who are legally exempt from filing tax returns, such as those who retired or have low income. However, some taxpayers, who have not filed their tax returns even though they had to, incorrectly used this portal to file taxes to receive their economic impact payment. A special agent from the IRS said the IRS criminal and civil departments would use this information to identify and track non-filers. Therefore, the number of identified non-filers is expected to rise exponentially.
Why Should Non-Filers File Tax Returns As Soon As Possible?
If a taxpayer hasn’t filed tax returns in the past several years, it is strongly recommended that they file their returns as soon as possible, even if they can’t pay them off at the moment.
If taxpayers fail to file or pay the returns, the IRS will keep adding penalties at an extremely high rate and also charge them interest. The IRS charges 5% of the amount due every month for failure to file, and 0.5% for failure to pay for a maximum of 25% each. Because of 0.5% reduction in penalty for any month, the maximum penalty amount combined is 47.5% of the taxes owed.
Compliance is Required before Resolution
The first step on the road back to compliance is filing back tax returns, which will stop the failure-to-file penalty. What’s important is that the taxpayer needs to be “current” with any filing obligations to be eligible for any back tax liability settlement with the IRS.
To be Current, You Must:
- File tax returns for the most recent six years, and
- Make current tax payments.
- sufficient withholding (W-2 employee)
- estimated tax payments (self-employed)
- quarterly payroll tax deposits (business)
Substitute for Return is a Killer
It’s possible that the IRS may have already filed a return for you with whatever information they have available. This is called “Substitute for Return.” Bear in mind that this return doesn’t include any of your allowable deductions, expenses, or credits. They may have filed a tax lien or assessed hefty penalties on your account. However, if the IRS files an SFR, that tax year is never dischargeable in bankruptcy, even if the taxpayer files the actual return to correct the liability later.
Resolution Options for Tax Problems
If qualified, Offer in Compromise allows a negotiation to settle back tax liability for a substantially reduced amount from the full amount owed. Keep in mind that the IRS can reject the offer if the financial documents are not professionally prepared or the taxpayer is not in compliance with the IRS. For applicants who have not filed all of their tax returns or made all required estimated tax payments or deposits, their offers will be rejected.
The Installment Agreement is for those who are unable to make the full tax payment immediately. There is a limit to how much they can owe to qualify for the agreement for online application. Thus, non-filers should consult with a tax relief professional for detailed information.
Another method is to see if they qualify for a Currently Not Collectible status upon submitting a financial statement. If the taxpayers have no means to pay the debt at the moment or anytime soon, they can request the IRS to delay the collection process until their financial situation improves. Note that this doesn’t mean the back tax liability will disappear — the IRS can come back and collect your taxes years later. Other solutions include lien release, release of wage or bank levies, penalty abatement, etc., depending on the non-filer’s situation.
Without these alternative solutions, the amount the taxpayer owes to the IRS can become so massive that they cannot pay off the amount. It’s like this huge snowball rolling downhill, getting bigger and bigger with growing penalties and interest. In fact, millions of taxpayers in America are delinquent in filing tax returns and are struggling to pay the IRS.
If you’re struggling with tax problems, it is recommended that you seek help from tax relief experts who can guide you through the most suitable resolution method and reduce the liability owed to the IRS to the lowest amount possible. This can resolve your non-filing problems effectively and permanently.
James Cha is a CPA and Certified Tax Resolution Specialist® at Ace Plus Tax Resolution, providing permanent solutions to taxpayers with IRS and state tax problems. He has been representing his clients and dealing with the IRS for over 30 years. His practice is in Los Angeles, but his clients are across the nation. Call us at (213) 600-7388 or James@AcePlusTaxResolution.com.