The IRS claims to have built a list of millions of non-filers with substantial income. They were ready to pull the trigger on a program to begin investigations of the people on that list when COVID hit. Everything went on hold. The IRS is now officially back in the office and picking up where it left off.
What should you do if you think you might be on this list? Your number one priority should be to keep your case from going criminal. If you think the past due taxes are substantial, talk to a tax attorney with experience in criminal tax matters. Attorneys have confidentiality privileges that CPAs and other tax preparers do not, so do not go blabbing to them about your problem.
The next step is to prepare the missing returns. If you have not filed for decades, there is some good news. IRS Policy Statement 5-133 only requires that you catch up the last 6 years of returns. Don’t have the records? Not a problem for the IRS. They will happily compute the highest tax possible with the information they have. Reconstructing the records using a forensic accountant is costly, but more likely than not, worth it.
Once you have the missing returns prepared and the scope of the problem identified, it’s time to work on the strategy. If criminal action is likely, listen to your attorney. Jail time is a real bummer. If it’s not a criminal case, then you need to work with someone who knows how the IRS Reasonable Collection Potential formula works to determine which path to follow to clear the debt. Most people in this situation do not have the assets and income that will allow them to pay the debt in full. An Offer-in-Compromise is the best bet in these cases.
Timing is everything in getting out of this mess. The best outcomes happen when you come forward voluntarily, with returns in hand, and a strategy to clear the debt. Waiting for the IRS investigation to start means you will be facing hard deadlines throughout the process along with an unsympathetic Revenue Officer.