Did You Get IRS Notice CP-59? Take It Seriously And Act Fast

One week ago the IRS announced a new enforcement campaign aimed at the lowest of low-hanging tax enforcement fruit there is: individuals who have not filed their tax returns. The IRS is mailing 20,000 to 40,000 letters a week, beginning with high income filers, letting them know that the IRS has not received a tax return from them for at least one year between 2017 and 2021. A week after the dust has settled, and the first round of letters are arriving in mailboxes, it is time for a deeper dive into how taxpayers who receive these letters should – and equally importantly – should not respond.

The first round of letters arriving in mailboxes now are being sent to the highest income taxpayers who have not filed returns, those who the IRS believes earned between $400,000 and over a million dollars a year. This doesn’t necessarily mean all of them owe a significant amount of tax, because it is possible taxes were withheld from wages sufficient to cover their tax liability. But many will be high-income self employed individuals who have not filed their taxes.

How does this happen? One year someone gets behind in gathering information, or their accountant sends over a draft return and they didn’t review it, or any number of things. Once a tax return isn’t filed, it is increasingly difficult to get back on track. Some accountants have told my clients that they can’t file a current year return until all past year returns are filed (this is *not* correct). But there is a significant snowball effect. One missed return leads to two, to three, and on and on. Most of my clients who have come to me with this problem have been lying awake at night, worried, but have felt the problem is insurmountable. They are always relieved when it is over, but the resolution process is painful and expensive.

So much of practice before the IRS and before the Department of Justice, Tax Division is making judgment calls. It is rare to find a very clear right answer to complex tax problems or strategy calls. Some of the smartest and most experienced attorneys I know disagree about the best way to solve a tax dispute. One thing that struck me as I read the many articles about this new enforcement campaign is they made it seem so easy – just file your missing returns. Hurry up, do it now, and get right with the IRS. But it is not that easy. As I explained before, high income taxpayers who are behind in filing should work with an attorney and an accountant to come into compliance.

Given the incredibly broad reach of this non-filer campaign, I reached out to my colleagues from across the country to see if there’s a consensus on how to approach this non-filer program for high-income individuals.

What Should Taxpayers Who Have Not Filed Do?

One thing everyone agrees on: now is the time to act.

According to New York tax attorney Megan Brackney, “Whether or not they receive a letter or other contact from the IRS, anyone who is delinquent with their tax returns should make arrangements to file those returns. Depending on the number of years of delinquency and the anticipated amount of tax liability, taxpayers may want to consult with an attorney or accountant about the best way to approach the IRS. Especially for high income non-filers, the time has come to get caught up on tax filings and not keep hoping for the problem to go away on its own.” However, Brackney added that unless there is a compelling reason to do so, she won’t be having her clients complete the Form 15103. “For many people who complete Form 15103, the reason for non-filing should not subject them to criminal liability. Reasons such as illness, job disruption, or other difficult circumstances would not suggest fraud or other affirmative acts of evasion. Taxpayers with concern about answering this question should consult an attorney about whether it would be appropriate to assert their Fifth Amendment right against self-incrimination on this form,” Brackney explained.

Steve Toscher, a California based tax attorney agrees, adding, “Taxpayers who have unfiled tax returns with these large amounts of potential tax liabilities, have serious exposure to criminal penalties and should not wait for the letter-act now by seeking an expert experienced in handling criminal tax matters.”

Will People Really Go to Jail For This?

While the IRS would not provide answers to all of the questions I asked them about this program, on this one I did get a very clear answer: yes. An IRS official commented, “[IRS] CI has said publicly that high-income non-filers are a priority for the IRS and for CI. We can confirm that we have cases that address this priority in our inventory but are unable to comment beyond that at this time.”

The former director of IRS Criminal Investigations, Don Fort, agrees taxpayers who haven’t filed may face criminal charges. “I think any answer that espouses any anti government sentiment will automatically go to CI. I think the non-responders are also at high risk for CI potential with additional work,” Fort explained. Former IRS executive Kathy Enstrom agrees, adding, “The most obvious Reason for Not Filing that could cause a referral, would be claiming they do not have to pay federal taxes due to the unconstitutionality of taxes and claiming to be a sovereign citizen. But that alone is just an indicator (badge) of fraud. There needs to be additional indicators that show a significant tax due and owing, multiple years of non-filing and intent displayed that they knew they needed to file and made the decision not to.”

In other words, if you are in the group of Americans who thinks you are a sovereign citizen or that the Sixteenth Amendment was never ratified, don’t fill out the form explaining that is your reason for not filing tax returns. It is a statement that will most certainly be used against you.

And that’s not the only thing that could lead to criminal charges. “The willful failure to file a tax return would generally be a misdemeanor under the Internal Revenue Code, but where there are affirmative acts indicating tax evasion, the Department of Justice and Criminal Investigation Division can and will pursue felony charges. Even a misdemeanor failure to file and other facts and circumstances, including the large amounts involved in this targeted group of taxpayers, can land a taxpayer in jail,” cautions Toscher. He added, “Remember Wesley Snipes,” who was sentenced to the maximum three years in prison for three misdemeanor failure to file counts.

Why Hire An Attorney to Hire An Accountant? Why Not Just Hire An Accountant?

Hiring an attorney who, in turn, hires an accountant is much safer for high income non-filers than just hiring an accountant. Conversations with accountants are not protected by attorney-client privilege and an accountant may (and in fact, often are) be compelled by subpoena to testify against their client. Instead, when an attorney hires an accountant, known as a Kovel accountant, the communications can be protected by attorney-client privilege.

According to Brackney, “The term “Kovel” refers to an extension of attorney-client privilege to an accountant. The key for an effective Kovel engagement is that “the presence of the accountant is necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.” United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).

The Kovel privilege ends at the time that the returns are filed, because the taxpayer is no longer keeping the information confidential. Even if it the timeframe of the Kovel privilege is limited, it may still be worthwhile in situations where the taxpayer is concerned that he may have criminal exposure and may need to maintain privileged during the time period that the attorney and accountant are putting together information for the returns.”

St. Louis tax lawyer Sandy Boxerman agrees, adding, “I always want the delinquent returns prepared by a Kovel accountant. I want to see what the returns might look like before advising the client what to do. Perhaps after seeing the Kovel’s draft we might decide not to file. Or we might decide that there is a good faith basis for taking a different position than the preparer might have initially come up with. It can be very ill-advised dangerous to have delinquent returns prepared by anyone other than a Kovel accountant in my opinion.”

I often have to give my client the bad news that when they have a criminal tax investigation or a serious civil tax exam they need a new, Kovel, accountant because otherwise they may find themselves with an accountant testifying about litigation strategy due to privilege waiver.

What about International U.S. Taxpayers?

Without a doubt, a large percentage of the taxpayers who have and will receive the CP-59 Notice will be United States citizens who are living and working abroad. Scott Michel, who has practiced in this field for over forty years, thinks U.S. taxpayers living abroad have difficult choices to make. “Obviously any non-filer with international issues,” such as Report of Foreign Bank Accounts, information returns, etc., “is in a real pickle on this,” Michel said. Normally, international filers who have not filed can come in under a program that would cap incredibly expensive information form reporting penalties. Those penalties are not tied to tax due, but instead are tied to the failure to file the form. They can be incredibly expensive. For those taxpayers, deciding how to proceed will require expert guidance.