The IRS Is Coming! Get Your Clients into Compliance

10 million high-income taxpayers targeted.

By Eric Green

Those of us in the know have been saying for a while now that the IRS is sending a “wave” of tax notices, and you need to prepare your clients for compliance and, ultimately, remittance and resolution. Well, that day has finally come.

The IRS is launching its long-awaited effort to crack down on high-income taxpayers who have failed to file tax returns.

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For practitioners, many taxpayers will be scrambling for help from tax professionals.  Understanding how to handle these taxpayers when they come in will have a real impact on how painful the re-entry into the tax system is going to be.

The IRS believes there are more than 10 million non-filers, many of whom are high-income earning. With the COVID pandemic behind us, the IRS phones are staffed, and mail has (for the most part) been caught up. The IRS has concluded it’s time to remove the proverbial gloves and go after these taxpayers.

The first issue most tax professionals will need to deal with is to identify:

• What tax years are missing?
• How many returns need to be completed and filed?
• If there is a state income tax, what to do about missing state returns?

Tax Compliance: Federal

It need not be overstated to your clients that tax compliance is critical for a number of reasons, including:

1. Don’t run up more debt if you have balances due
2. Avoid adding an extra 25% onto the debt for failure to file penalties and more for failure to pay
3. Work out a resolution with the IRS to settle the back tax debt
4. Avoid a potential criminal referral for the failure to file and/or pay
5. Claim any refunds owed to the taxpayer before they are lost

If taxpayers file a return with a balance due, they quickly begin increasing that balance for the 25% failure to file and failure to pay penalties. Hence, taxpayers who file their return timely, even if they cannot pay the balance immediately, save themselves the failure to file a penalty and the interest that would otherwise accrue.

Another reason to file your tax return on time is to claim any refund that you are owed. Pursuant to IRC § 6511, a taxpayer has three years to claim a refund, and a refund means either having the overpayment returned to you or applying it to the next tax year. If the three-year window is blown, that refund is almost certainly gone, donated to the US Government.

From my perspective, the most important reason to get a taxpayer into compliance is in order to work out an arrangement on the back tax balance with the IRS.  To put it bluntly, the taxpayer is not eligible for a payment plan or an offer-in-compromise if he or she is not in tax compliance.

So what qualifies as “Tax Compliance?” In the simplest terms, it means the taxpayer is making their current period’s tax payments, and they have filed their tax returns for at least the last six years. Right now in 2024, a taxpayer can get into compliance by having 2018 – 2023 returns filed with the IRS and by making their 2024 tax payments properly, either by having sufficient tax withholding done (if they are an employee) or by making their estimated tax payments on time (if they are self-employed).

Tax Compliance: The State

Most states do not follow the same six-year rule the IRS does when handling returns for what is owed in a taxpayer’s state. However, virtually every state has a Voluntary Disclosure program that allows taxpayers who have not filed to come in and get into compliance with a limited lookback and no criminal referral.

Often, the states also provide a break on penalties and/or interest to incentivize non-filers back into the system. Each state has its own programs and look back, for instance:

• Connecticut requires the last three years that are past-due
• Massachusetts requires seven years for residents and only three years for non-residents
• New York requires three to six years, depending upon the length of the non-compliance
• New Jersey requires the last four years that are past-due
• California requires the last ten years

Review the taxpayer’s state voluntary disclosure program to determine how many returns need to be filed and what other incentives there might be.

Federal Voluntary Disclosure

Unlike the various states, the IRS voluntary disclosure program is only meant for taxpayers who believe they have criminal exposure. For a non-filer, this generally means there is some other aggravating factor beyond the simple non-filing, like paying undocumented workers, etc.

If a taxpayer believes they have potential exposure, it is critical that they speak to a criminal tax attorney before proceeding, or even deciding how to resolve their issue with the IRS.

Posted on March 7, 2024