Dealing with IRS Notice CP-59: A Call to Immediate Action

As we reported in a recent news post, the IRS is aggressively cracking down on high-income, non-filing taxpayers. Now, that this process has begun, many of those high-income earners are receving an IRS Notice CP-59 and are wondering what they should do. In this article, we would like to answer that question as well as stress that not responding, or a slow response to these notices, can have negative implications.

So, let’s look at this.

What is IRS Notice CP-59?

IRS Notice CP-59 is a first notice that the IRS sends to taxpayers who have failed to file a tax return. The notice is essentially a request for the tax return, and it typically includes the year for which the return is missing. It’s important to remember that this notice is not a bill. Rather, it’s a reminder from the IRS that they have no record of your tax return for a specific year.

The IRS is sending out 20,000 to 40,000 letters each week, starting with high-income filers, to inform them that the IRS has not received their tax return for at least one year between 2017 and 2021.

Who is Receiving this CP-59 Notice?

The IRS is sending these notices to individuals that they believe earn between $400,000 and over a million dollars a year. This doesn’t mean they all owe a hefty amount in taxes, as it’s possible their wage withholdings covered their tax liability. However, many could be high-income, self-employed individuals who have not filed their taxes.

Tax filing delinquency can happen for many reasons that are not criminally motivated. And once a tax filing is missed, it can sometimes cause a ‘snowball effect’ on subsequent annual filings.

Some taxpayers have been given bad advice and told that they can’t file a current year tax return unless all of the past year’s have been filed. Based on this bad advice, some taxpayers get into a filing ‘hole’ that they don’t believe that they can get out of easily.

But, for high-income, non-filers, this catch up process can be quite involved and complicated. For that reason, they should work with a tax professional and a tax attorney to make sure that they get back into compliance with their tax filings.

Can Non-Compliance in the Matter Lead to Potential Jail Time?!?

The short answer is ‘Yes”. This is why it is important to respond to these notices correctly AND promptly. If there are reasons that the IRS may feel some form of fraud is involved, the matter can by referred to IRS Criminal Investigations.

Former IRS executive Kathy Enstrom states, “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.”

But that is not the only flag that might lead to a criminal investigation. Any indication that the individual purposely did not intend to pay taxes could cause misdeamor charges at a minimum, or felony charges if the intention was to evade paying taxes all together.

Why You Should Hire a Tax Attorney First in Response to this Notice

Rather than hiring a tax accountant to assist in a response to a CP-59 notice, it is strongly advised that you engage a tax attorney first. Then, let your new tax attorney engage the tax accountant.

The biggest reason for doing this – in this order – is because the ‘attorney-client’ privilege would be extended to the accountant, referred to in this situation, a ‘Kovel” 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).

During the filing process, all matters reviewed by the Kovel accountant can maintain confidential. This confidentiality nature of the accounting work ends once the tax filing has been submitted, but this allows the attorney to get a clear picture of the financial situation prior to any formal discussions on their client’s behalf with the IRS.

International filers will have the most need for a tax attorney. Typically, international filers who have not previously filed can participate in a program that caps the substantial penalties for failing to submit information forms. These penalties are not linked to the tax due, but rather to the failure to submit the required forms, and they can be quite costly.

No matter what your situation, if you do receive a CP-59 notice from the IRS, contact our offices immediately to discuss your options.