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IRS Launches New Effort Aimed At High-Income Nonfiler

Steven WalkerJune 24, 2024

Are you someone who has unfiled tax returns with the Internal Revenue Service?

On February 29, 2024, the IRS launched a new effort aimed at high-income nonfilers, including millionaires, who failed to file tax returns with financial activity topping $100 billion. IR-2024-56. The effort includes sending letters on more than 125,000 cases where tax returns have not been filed since 2017. Id. Although many individuals fail to file tax returns for innocent reasons such as a family tragedy or mental health issues, the consequences can be devastating if the federal Government sets its sights on you.

How does the Government find you? The IRS collects information based on third-party information reported to the Government (e.g., Form 1099 or Form W-2 income). If the IRS determines that there is a deficiency, the IRS issues a notice of deficiency to the taxpayer by certified or registered mail. IRC 7212(a). The issuance of the notice of deficiency suspends the running of the period of limitations, the period that Government has to assess. I.R.C. 6503(a); Treas. Reg. 301.6503(a)-1. If the taxpayer fails to respond to the SNOD, the IRS assesses the taxes, which leads to collection actions –tax liens and levies.

“People receiving these letters should take immediate action to avoid additional follow-up notices, higher penalties as well as increasingly stronger enforcement measures. People in this category should also consult with a tax professional so they can quickly file their late tax returns and pay delinquent tax, interest, and penalties. The failure-to-file penalty amounts to 5% of the amount owed every month – up to 25% of the tax bill. There is also special non-filer information on IRS.gov that can assist them.” See IR-2024-56.

Section 7203, Failure to File Return or Pay Tax

The case can turn criminal, as opposed to remaining a civil matter. There is a code section in the Internal Revenue Manual dealing with the failure to file a tax return or pay the IRS, and what is important is that this crime is a misdemeanor (as opposed to a felony. See I.R.C. § 7203.

To establish the offense of failure to make (file) a return, the Government must prove three essential elements beyond a reasonable doubt: (1) the defendant was a person required to file a return; (2) the defendant failed to file at the time required by law; and (3) the failure to file was willful. See CTM § 10.05[1].

The Tax Division’s policy is that I.R.C § 7203 should only be used when an individual failed to comply with an affirmative act requirement of the Internal Revenue Code and did not commit any act or omission as part of an attempt to evade taxes or obstruct the IRS. See CTM § 10.02.

Although the willful failure to file a tax return is a misdemeanor (26 U.S.C. § 7203), if the Government can show an affirmative act constituting an attempt to evade or defeat a tax, it becomes a felony –tax evasion. 26 U.S.C. § 7201 (Attempt to Evade or Defeat Tax). Al Capone, an American gangster, was convicted of tax evasion.

Section 7201, Attempt to Evade Tax

26 U.S.C. § 7201 is the statute for tax evasion, and it applies to “any person”, and this is essential because it can be a taxpayer, a promoter, or return preparer. There must be affirmative acts of evasion under I.R.C § 7201, and so there cannot be simply a failure to file a tax return; there must be something more (e.g., affirmative acts).

“I.R.C § 7201 proscribes a single crime – attempted evasion of tax – which can be committed in two distinct manners: (a) the willful attempt to evade or defeat the assessment of a tax and (b) the willful attempt to evade or defeat the payment of a tax.”  See DOJ Criminal Tax Manual (CTM) § 8.03.

“In order to establish the offense of tax evasion, whether of assessment or of payment, the government must prove, inter alia, that the defendant engaged in some affirmative conduct for the purpose of misleading the IRS or concealing tax liability or assets.”  See DOJ Criminal Tax Manual (CTM) § 8.03.

In Spies v. United States, 317 U.S. 492, 499 (1943), the Supreme Court, “[b]y way of illustration, and not by way of limitation,” set forth the following as examples of conduct from which an “affirmative willful attempt” may be inferred:

“By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.”

Conclusion

If you are a high-income earner who has unfiled tax returns, it would be wise to contact competent tax counsel, who can evaluate your particular situation and advise you of your best options. Do not gamble with your future and avoid criminal tax prosecution. It’s just not worth it.

Article by Philip Wolf and Steven L. Walker