It’s been a dry season for the IRS thanks to COVID-19. The usual tax filing deadline of April 15 was pushed back until July 15. They have limited many of their usual activities to protect employees and the public, and they have had a limited workforce to carry out tasks. All of this has slowed the usual flow of cash to a trickle.
But things are about to change. The IRS is running at full capacity (or close to it) as of July 15, and they have announced a couple of initiatives that will target non-filers—specifically, wealthy non-filers.
Why the wealthy?
Some of the impetus for these two initiatives comes from a report issued in May by the Treasury General for Tax Administration (TIGTA). The report estimated that between 2011 and 2013, the failure of wealthy individuals to file their tax returns resulted in tax underpayment to the tune of $37 billion. That kind of financial loss is not easy to overlook, and it spurred the IRS to launch the initiatives.
How did this happen?
While failing to file tax returns is not the domain of the wealthy alone by any stretch, there are some things that make it easier for certain wealthy individuals to get out of paying their dues to the government. For one, many upper-income earners are independent contractors. For traditional employees, taxes are regularly withheld from paychecks. This is not the case with independent contractors, however, making it easier for them to escape the watchful eye of the IRS, even though they may have plenty of taxable income.
Another opportunity for high-income earners to evade taxes is through private foundations or “pass-through entities.” Pass-through entities are business structures that escape corporate taxation by passing income through to individual owners and/or investors. Examples include partnerships or S corporations. Private foundations and pass-through entities can facilitate loopholes that allow taxpayers to conduct prohibited transactions. For example, individuals can align with private foundations and engage in “self-dealing,” which involves making loans to disqualified individuals.
What is the IRS going to do about this?
First, the IRS will be cracking down on upper-income individuals who have failed to file taxes. In addition to owing back taxes, these people will be subject to a 5% penalty for each month that payment is late (up to 25%). They will also be subject to a late payment penalty of .5% per month (with a 25% ceiling).
Second, the IRS will be targeting individuals with at least one connection to a pass-through entity or private foundation. Audit letters will be sent to these individuals from July through September, and their involvement with these entities will be closely scrutinized for any illegal activities.
How much does the IRS hope to recover?
The IRS estimates that among upper-income non-filers, about half owe more than $50,000 in back taxes while close to 2,000 owe more than $1 million. By targeting these delinquent taxpayers, the IRS is poised to get a maximum return on the investment of their time as they attempt to revive their cash flow after COVID-induced shutdowns.
Will the IRS be open to negotiations?
The IRS makes some provisions for extenuating circumstances: catastrophic life events, financial struggles triggered by the faltering economy, etc. If you have a compelling reason for not filing your taxes, you may be able to get the IRS to waive penalties or work out a payment plan with you. You’ll want to tread carefully, though, as the IRS does not have unlimited mercy. If you can’t uphold your end of the bargain in an installment plan, you might be subject to criminal penalties, including up to five years in federal prison.
What can you do?
Our best advice is not to wait until the IRS comes for you. If you’re an upper-income earner and have failed to file taxes—or if you’re involved with a pass-through entity or foundation that has conducted questionable activities—the time to act is not once you’ve received your audit letter.
Meet with a tax resolution specialist who can help you prepare your defenses and work out options for paying back taxes that will help you get square with the IRS—on your terms. The IRS is not a good monkey to have on your back. They can be a pretty intimidating opponent and cause a lot of stress.
As the owner of The Tax Defenders, I know this first hand. After returning from Operation Desert Storm, I went to law school and launched multiple businesses. I accrued some tax debt and sought to resolve it with the IRS. It was a difficult and stressful experience, and I knew there had to be a better way. That’s one of the reasons that I started The Tax Defenders.
We treat every client with respect. We examine their case individually and help them understand all of their options for resolving it. We are transparent and don’t sugarcoat, but we do present workable solutions that help our clients stay intact financially while clearing up debts and other issues with the IRS.
Our tax relief attorneys know the IRS backward and forward because they have been working with them for a long time. They know about how to negotiate with them and to present clients’ cases in the best light possible.
So be proactive, get help, and work out a path forward today. You can resolve your taxes in a financially beneficial way and move forward without the stress of trying to dodge the IRS.
