IRS Audits of High-Net-Worth Individuals – The Case of “Getting Around to It” and the Missing Tax Returns

Have you been too busy to file your tax return for multiple years and just couldn’t get around to it? Was your income during those years more than $400,000? Have you recently received a letter inviting you to file back tax returns? If you answered yes to those questions, you are among a select group of 125,000 taxpayers. The Internal Revenue Service (IRS) knows who you are, and you have their undivided attention!

After enduring over a decade of funding deficiencies and being stalled through the pandemic, the IRS is at last undertaking a project to specifically target high-income taxpayers who have not filed returns for multiple years, going back to 2017.

The IRS is a formidable force when it comes to tracking down non-filers. With its vast database of taxpayer information and sophisticated technology, the IRS is well-equipped for this task.

The IRS maintains an extensive database of taxpayer information. This database includes not only tax returns but also information from third-party sources such as employers, banks, and financial institutions. Every year, millions of tax documents are filed electronically or via mail, providing the IRS with a wealth of data to analyze.

The IRS employs cutting-edge technology to analyze and cross-reference this data. Through data mining and advanced algorithms, the IRS can identify patterns and anomalies that may indicate noncompliance.

One of the IRS’s most powerful tools is its ability to match taxpayer information with data provided by third parties. For instance, if an employer reports wages paid to an employee, but the employee does not report those wages on their tax return, the IRS will detect the inconsistency. Similarly, financial institutions report interest and investment income to the IRS, enabling them to verify the accuracy of reported income. The Service has identified more than $100 Billion of income that has gone unreported on tax returns for the select group of non-filers. Naturally, the Service has no way of knowing what expenses these taxpayers have to offset their unreported revenues.

Should the government’s gentle reminder go unanswered, the IRS intends to begin collection efforts. The IRS can also prepare what is known as a “Substitute for Return” to calculate an assessment against the taxpayer. Remember, penalties and interest continue to run on the outstanding balance, and of course, the statute of limitations never runs out because a return was never filed. Moreover, audits and possible criminal referrals are possible.

If you are a taxpayer in this category, you should contact a Withum tax professional to bring you into compliance before the IRS gets more aggressive. This is even more urgent should you have foreign interests where the consequences of noncompliance can be even more severe.