IRS Targets Millions of Tax Return Nonfilers

IRS LAUNCHES NONFILER INITIATIVE

 Agency Targets Millions of Tax Return Nonfilers

Each year, millions of citizens required to file tax returns fail to do so. According to an analysis by the Treasury Inspector General for Tax Administration (TIGTA) released in 2020, the number of suspected nonfilers has grown from approximately 7.5 million in 2010, to nearly 11 million in 2016 (TIGTA Ref. No. 2020-30-015, May 29, 2020). I can only assume the numbers are much higher now, given the economic grief the nation has suffered since March 2020.

The IRS identifies nonfilers primarily by third-party income reports filed with the agency. The most common reports are Forms W-2s showing wage income, Forms 1099 showing miscellaneous income, and similar documents reporting such things as interest and dividends. The IRS compares these reports using Social Security Numbers with its database of filed tax returns. When data shows income reported, say, on Form W-2, but no corresponding tax return, the agency assumes that person is a nonfiler. The IRS also identifies potential nonfilers by analyzing one’s prior-year filing history. For example, suppose a person filed a return in 2022 reporting $100,000 of wage income. It is presumed that such person is also required to file in 2023, and is likely to have earned the same or similar income.

Of course not every person who fails to file a return is required to file. Code sections 6001, 6011, 6012, and 6017generallycontrol the question of who is required to file. The requirement to file is driven by the receipt of income, not whether one actually owes tax. One’s income must exceed a certain threshold (depending generally on filing status) before the obligation to file is triggered. Moreover, just because one was required to file in a past year does not itself create a filing obligation in subsequent years. Each year’s filing and payment obligations are controlled solely by the facts and circumstances of that particular year.

The Failure to File May Be Criminal

The failure to file a tax return can be a criminal act, subject to potential fines and jail time. Code section 7203 makes the willful failure to file a return a misdemeanor. However, in a failure to file case, the IRS must prove beyond a reasonable doubt that the accused: a) was legally required to file, b) failed to file, and c) that the failure was willful. That is, it was done as a voluntary, intentional act carried out specifically for the purposes of violating the law. This essential element of willfulness makes proving a criminal tax case very difficult. Chapter 3 of my book, How to Get Tax Amnesty, describes in detail the legal concept of “willfulness” and the level of proof required to sustain a conviction.

Most Nonfiler Cases are Civil

Because of the strict burden of proof required in criminal cases, most nonfiler cases are purely civil. That is, the IRS works to secure the delinquent returns, or otherwise makes a tax assessment based on available information. Either way, it then sets out to collect the assessment. In a civil case (unlike a criminal case), the burden of proof is on the taxpayer. With regard to an unfiled return, the taxpayer must prove that the return was filed or that no return was legally required. Otherwise, the taxpayer has the affirmative duty to report income and any deductible expenses allowed by law.

Short of that, the IRS uses its authority under code section 6020(b) to prepare a return for the nonfiler. This is known as a Substitute for Return (SFR). Section 6020(b) reads as follows:

 If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.

Subscribe to read the rest of this newsletter including:

• Why the The Nonfiler Initiative
• Are “High-income Earners” the Only Targets?
• What is the IRS’s Definition of “High Income”?
• CURING DELINQUENT TAX RETURN FILINGS

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