$441 billion was the identified tax gap (the difference between the amount of taxes that should be paid and the amount voluntarily paid on time) in a recent audit of the IRS by Treasury Inspector General for Tax Administration (TIGTA). In its May 29, 2020 report, TIGTA attributed $37 billion or 8 percent of the $441 billion (for tax years 2011 through 2013), to individual taxpayer non-filers, and further attributed a large portion of such to high-income individuals, defined as those with income of at least $100,000. The IRS directly receives third-party information (W-2’s, 1099’s, K-1’s, etc.) and is able to compare this information to determine failures to file or tax underpayments.
In a more recent period, 2014 through 2016, TIGTA identified 879,415 high-income individuals who failed to satisfy their filing requirements and who had unpaid taxes $45.7 billion. Of those individuals, 326,579 were not placed in a field agent’s inventory to be investigated and 42,601 were in the agent’s inventory, but were closed-out with no investigation. An additional 510,235 high-income non-filers with estimated taxes due of $24.9 billion are in an agent’s inventory but remain unresolved and TIGTA found that IRS pursuit of such non-filers was unlikely.
The IRS has taken immediate steps to correct the TIGTA identified deficiency. High-income non-filers, particularly those owning pass-through entities or who have created private foundations, should now be aware they have likely been identified and that IRS attempts to audit and/or otherwise collect unpaid taxes are underway. It is anticipated that in forthcoming audits of this group the IRS will be focusing on foreign assets, associated entities (partnerships, trusts, S corporations, C corporations), gifting and private foundations. Non-filers will be subject to interest and civil penalties, including fraud penalties, and may also be subject to criminal prosecution.
If you find yourself in the category of high-income non-filer, then consider a proactive approach and discuss your concerns with your advisors, including tax counsel, to determine what you may do now to prepare for an IRS examination and the ways you may minimize interest and penalties associated with your outstanding tax liability.
Strobl Sharp is a team of experienced and trusted lawyers that can advise on matters relating to individual, closely-held business and non-profit taxation and controversy, federally and in Michigan. For more information, visit Strobl Sharp online at www.stroblandsharp.com or on LinkedIn.