Non-filers are in the IRS Crosshairs

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.

Non-Filers and Refunds – The Medical Exception

Previously I detailed that there was a statute of limitations on when you could file a claim for refund and get credit for any overpayments. That limit is 3 years from the due date or 2 years from the date of payment whichever is later. There are exceptions to this law and one of those is for medical reasons.

Sometimes it’s not laziness that produces a non-filer situation. Medical problems can also result in non-filer status. Congress carved out an exception for this in the tax code and the IRS issued Rev. Proc. 99-21 to cover this situation. The statute of limitations is suspended when the taxpayer is determined to have a mental or physical impairment that can be expected to result in their death or last for a period of at least 12 months.

There are two major requirements to use this exception:

    1. No person was authorized to act on behalf of the taxpayer, including their spouse, during the disability period, and
    2. There must be a written statement from a qualified physician as to the disability. This statement must be detailed and specifically state that the taxpayer was prevented from managing his or her affairs.

There are lots of ways to get the physician’s statement wrong, so pay attention to Rev. Proc. 99-21 if you are going to use this exception.

Are you required to Correct a Substitute for Return?

The taxpayer refuses to file a return. The IRS records of 1099s and W-2s show that the taxpayer probably owes taxes, so they file a return for the taxpayer. This is called a ‘Substitute for Return’ and it is a legitimate tax return for all legal purposes.

Eventually, as the pressure from the IRS grows, the taxpayer realizes that the easiest path in life is to get into compliance. They prepare the missing returns and discover that their calculations show a higher tax than the IRS’s assessment. Are they required to correct the IRS? If they fail to do so, are they open to a fraud charge?

The answer is NO! The IRS has made a legal assessment. If the lower amount is what the government wants to use, the taxpayer’s only legal requirement is to pay the tax assessed.  You are only in trouble if you provide false information to the government. The fact that 3rd parties did not report all of your income is not your problem.

Substitute for Return Basics

The IRS cannot assess a tax on you without a filed return. This puts them in a difficult spot. If the taxpayer does not file a return, what can they do to get a balance due on their books? The answer is the “Substitute for Return”. Basically, they file one for the taxpayer using the information on hand as to what the income was likely to be. This is where all those 1099s and W-2s come into play. Once the IRS computers have officially filed a Substitute for Return, tax due notices can start.

Here are a few things to understand about the Substitute for Return:

    • The IRS is not out to minimize your taxes. They will file the return using single or married filing separate along with the standard deduction. No credits, no additional deductions.
    • You can still file your return voluntarily and correct any errors in the tax accessed.
    • You are not required to file any additional returns if say the IRS calculations of the tax were lower than your own calculations.
    • The big disadvantage to not filing and letting the IRS do the work is that taxes due from an assessment from a Substitute for Return are never dischargeable in bankruptcy.
    • Finally, the IRS only files a Substitute for Return when they think there are taxes due. Non-filers who have a refund due will eventually lose that claim once the 3 years have run out.

Haven’t filed forever! How many years to catch up?

The IRS currently has identified some 7 million potential non-filer cases. Getting caught up with them before they lower the ax is something that a lot of these people would like to do. But how do you go about that?

Do you have to go back to the beginning of time if you haven’t filed in decades? The answer is No. IRS Policy Statement 5-133 defines ‘Compliance’ as having the last 6 years of tax returns filed. File the last 6 years and the IRS will let you come in from the cold.

Compliance is an important issue for the IRS. They do not want to make a deal with someone who is compounding his or her tax problems. No payment plan, no Offer-in-Compromise, no relief from collection activities if your current returns are not being filed and your current year taxes are not being paid.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email

Are You One of the 7M Non-Filers?

Are you among  an estimated 7 million ‘non-filers’ in the USA? If you are, I’ll share bad news and good news. But first let’s look at the term non-filer:

Definition of a Non-Filer

According to Farlex Financial Dictionary (2009, accessed June 21, 2020),

“A non-filer is a person or corporation who does not file a tax return by the required date. In general, a person who has filed taxes once must continue to do so for the rest of his/her life (or existence, if a corporation).”

Let’s break that down a bit:

  • You’re a non-filer if you didn’t file in 2018 but did in 2017
  • You’re still  OK if you haven’t filed for 2019; the filing date was moved to July 15 2020 due to coronavirus
  • You’re a non-filer if you haven’t filed federal taxes in ten years (or 2-9 years for that matter) but did for some prior year(s), as required.
  • You’re a non-filer if you’ve never ever filed taxes (and were not exempt from filing).

As you might imagine, the longer it’s been, the more complicated it can be to get caught up, and the heavier the potential consequences in terms of interest, fees and penalties (25% of the original amount owed). If you have not filed because you know you’ll have tax debt you can’t pay, avoiding these penalties is your top priority.

I can guess the question many want answered: “What’s  my chance of staying  a non-filer forever—of flying under the radar ’til the statute of limitations runs out and I’m home free?”

Here’s the reality check, some bad news followed by good news:

The Bad News About Being a Non-Filer

The bad news (it may be news to you) is that if you are owed a refund you must claim it timely (within 3 years) or lose it. Read more about this in my post about the non-filer who believes all is good as the IRS owes him.

The other bad news  for non-filers is that data being collected about us in this digital age is being  scrutinized by IRS like never before. At one time it was easier to ‘get lost in the crowd’ and not file federal tax returns. But the IRS now has programs to identify and collect from people who are not filing and should be. The IRS is using public and private databases such as driver license records. By cross-referencing databases they can determine who is likely to be earning money that would require them to file.

The Good News for Non-Filers

What many others want to know of course, “Is there a legal way out that won’t bankrupt me or put me in money misery for ever?”

The first piece of good news for non-filers is that regardless of how many years have passed since you filed, to ‘catch up’ you only need to file the last six years. This fact could positively influence your timing. The second piece of good news is that the IRS wants a fresh start with non-filer citizens. It wants to kiss and make up, and get paid something. The steps to get square with the IRS are not complex, but choosing the best option for  your financial situation can be. You might also need help devising and carrying out a strategy to pay the least amount. That’s where I come in as your tax advisor and representative. If you’re a non-filer and have decided to explore getting square, I recommend you take me up on a free, confidential phone consult.

I’m CPA Jim Payne, your tax advisor and representative. I look after your interests. I look forward to serving you, saving you money, and releasing you from much of the stress and anxiety of dealing with the IRS or State of Florida tax authorities. Please text or call me at 352-317-5692 or email me for your free phone consult.