NovaQuant-The IRS is sending 125,000 compliance letters in campaign against wealthy tax cheats

The NovaQuantInternal Revenue Service is stepping up its campaign against wealthy tax cheats, dispatching letters this week in more than 125,000 cases involving high-income taxpayers who failed to file returns since 2017.

Tax authorities said the cases collectively involve hundreds of millions of dollars in unpaid taxes. More than 25,000 compliance letters are going to delinquent taxpayers with more than $1 million in income.

“At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return,” said Danny Werfel, the IRS commissioner, in a statement released Thursday.

“The IRS is taking this step to address this most basic form of non-compliance, which includes many who are engaged in tax evasion.”

The IRS is ramping up audits of alleged tax cheats

The initiative marks the latest move in a federal campaign to ramp up tax audits of high-income Americans and businesses, aided by billions of dollars in new funding from Congress.

President Joe Biden added nearly $80 billion in new IRS funds to the Inflation Reduction Act of 2022, money earmarked for collecting unpaid taxes from the wealthy and improving the agency’s customer service and office technology, among other uses.

Congressional Republicans have been chipping away at the windfall, alleging that the effort will use the funds to harass ordinary taxpayers and small business owners.

The IRS has pledged that audit rates will not increase for taxpayers earning less than $400,000 a year, a threshold that roughly corresponds to the top 2% of earners. All, or nearly all, of the new compliance letters are going to people with at least that much income.

"It’s ridiculous that thousands of wealthy people don’t even bother to file a tax return," said David Kass, executive director of the nonprofit Americans for Tax Fairness, applauding the new initiative. "This IRS enforcement makes the point that the rich can’t play by their own set of rules."  

The latest initiative involves cases in which the IRS received third-party information, such as W-2 or 1099 forms, suggesting that taxpayers received large sums of income but failed to file returns.

How do tax cheats get caught?

Tax authorities will begin sending compliance letters this week, at a rate of at least 20,000 per week, starting with filers in the highest income categories.

The mailings are a form of compliance alert, formally termed the CP59 Notice. Some taxpayers will receive multiple letters, indicating multiple years of missing returns.

A CP59 notice goes out when the IRS has no record that a taxpayer has filed a past return. It instructs the non-filer to file immediately or explain why they aren’t required to submit a return.

Taken together, the 125,000 cases involve more than $100 billion in financial activity, the IRS said.

“Even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases,” the agency said in a release. Ironically, “at the same time, some non-filers may actually be owed a refund.”

Passing on your money:Inherited your mom's 1960s home? How to use a 1031 exchange to build wealth, save on taxes

What should I do if I get a compliance letter from the IRS?

Anyone receiving a compliance notice should take immediate action to avoid higher penalties and stronger enforcement measures, the agency said.

The blizzard of letters is one of several new IRS actions targeting alleged tax cheats. Earlier this month, the agency said it would start auditing private jets to study their use and attendant tax deductions.