The IRS is Cracking Down on Nonfilers and Unfiled Returns

Billions of dollars are floating away into the ether each year, unclaimed by the IRS, not due to evasion or fraud, but something seemingly simpler—tax returns that never got filed.

The IRS has had enough.

On February 29, 2024, the IRS announced a crackdown on nonfilers, taxpayers that have not filed returns in the past but have been getting away with it for years.

The IRS relies on Delinquent Return Notices and the Substitute for Return (SFR) program. However, the effectiveness of these measures has been limited, resulting in significant revenue loss and a growing number of unaddressed nonfilers.

That’s all over now.

Tax professionals and business owners need to take notice and prepare for the implications of how it’s going to affect clients and the business owners themselves.

An Opportunity Arises within the Chaos

Despite the negative impact stronger enforcement will have on taxpayers, it also opens a window of opportunity for those who have unfiled returns to come clean and avoid potentially harsher penalties they likely would have received down the line.

Getting into compliance when you have unfiled returns is not as simple as it appears.

For tax professionals, this is a prime opportunity to guide clients through making good on unfiled returns, including which returns are required to be filed even if they are missing, when it makes sense to file a return in light of IRS Substitute for Return enforcement procedures, and how to tackle these issues to end up with the best possible outcome and the least amount owed.

A Closer Look

Here, I'll discuss nonfiling enforcement and compliance challenges through three key points: the magnitude of nonfiling, the IRS's shift in enforcement priorities,and navigating nonfiler compliance and resolution.

The Magnitude of Nonfiling: The tax gap attributed to nonfiling almost doubled from $39 billion in 2016 to $77 billion in 2021, signaling a significant compliance issue.

With millions of individuals and businesses with unfiled returns, the scope of the problem is vast. A focus on enforcing collections against nonfilers affects a large number of taxpayers and it requires informed strategies for minimizing risk.

A Strategic Shift in Enforcement: The days of getting away with not filing returns are over. IRS enforced collections against nonfilers are back and the sins of the past must be dealt with in order to minimize the damage that awaits. In other words, don’t wait around to see how this plays out.

Navigating Compliance and Resolution: As the IRS ramps up its enforcement efforts, it's essential to adopt proactive measures to ensure compliance and explore resolution options as balances associated with non-filed returns must finally be addressed.

You can't just file unfiled returns. Or you can, but your underlying debt will be much greater than what's required.

Navigating penalties, understanding the nuances of the Substitute for Return program, and taking advantage of IRS law and procedure regarding what's actually required when addressing unfiled returns and the balances owed must be done with specialized knowledge.

The reality is, you don’t know what you don’t know about unfiled returns.

TL;DR:

An intensified environment surrounding enforcement against nonfilers presents both challenges and opportunities for accountants and business owners.

Recognizing the significance of the issue, understanding the implications of renewed enforcement efforts, adopting strategic compliance measures, and leveraging professional expertise are essential steps to navigate what lies ahead.

By staying informed and proactive, tax professionals and their clients can effectively address nonfiling issues and mitigate the downside.

Next Steps

Don't wait for the IRS to come knocking.

For accountants with clients who have unfiled returns and business owners concerned about compliance, the time to act is now.

If you're a nonfiler, embracing a proactive and strategic approach will make a significant difference in how the consequences of unfiled returns affect you, including enforced collections, including bank levy and seizure, and taking advantage of your rights in order to minimize how much you owe.