Eric Hylton, the commissioner of the Internal Revenue Service Small Business/Self-Employed Division, threw down the gauntlet December 3, 2020 with an article the IRS pushed out on its newswire on how the IRS views high-income non-filers.
If there is any question about the tone of the article, it is answered in the opening quote:
“Our pursuit of these high-income non-filers provides an important service and shows respect to the majority of Americans who pay their taxes.”
Commissioner Hylton warns that despite COVID -19, taxpayers should understand that the IRS has not lost focus on identifying and pursuing high-income non-filers domestically and abroad. A big message is fairness in the administration of the tax system. The article frames fairness as:
“Taxpayers who exercise their best efforts to file their tax returns and pay their taxes, or enter into agreements to pay their taxes, deserve to know that the IRS is pursuing others who have failed to satisfy their filing and payment obligations.”
Next, the article emphasizes that even though historically, the IRS has classified high-income non-filers a priority, in early 2020, it shifted a considerable amount of resources to more aggressively attack the problem. This is not a surprise. What is a surprise is that the IRS identifies high-income as taxpayers who earned more than $100,000.
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Without using the terms artificial intelligence or data analytics, the article definitely describes the IRS’ use of big data to identify high-income non-filers. IRS SBSE established a new Office of Fraud Enforcement earlier in 2020. The Office of Fraud Enforcement is described in terms of a computer’s Central Processing Unit, or CPU, which:
“…connects the dots across all IRS divisions, and sometimes across federal agencies, to confront emerging threats and bring offenders to justice with both civil and criminal penalties. The office is also reviewing high-income non-filer cases that will be referred to the IRS Criminal Investigation Division to potentially be pursued criminally for offenses, including failure to file, tax evasion and tax fraud.”
This is the essence of the IRS data driven model that takes advantage of the new ability to sift through huge amounts of data to identify the most attractive targets for IRS intervention. Commissioner Hylton elaborates:
“Here’s a common misperception among non-filers. Simply not filing won’t keep them from being on our radar. Even if they don’t file, we still have ways to know how much income they should be reporting. We have a robust system to collect information from many sources to identify possible tax issues, including multiple third-party sources, taxpayers’ previous filing histories and their addresses. We also have other legal avenues that provide potential information for cases including:
Information provided to the IRS whistleblower program;
Information received from United States Attorney offices across the country;
Ongoing investigations by other law enforcement agencies;
Tips from colleagues, neighbors and friends;
Tax treaty and information exchange per case investigation requests.”
In effect, the IRS will have a file on a taxpayer before ever speaking with him or her. This makes an examination particularly challenging as the taxpayer has no knowledge of what the IRS knows and does not know. That is the same if the IRS decides that the first touch is not through Collection or Exam, but instead Criminal Investigation.
Since the future is now, what can we do about it? The answer is simple – contact a qualified tax professional and explore the existing options to remediate past non-compliance. Finally, remember that it is of utmost importance to engage in current compliance even if the past years have not yet been addressed.