IRS CP59 Notice: A Guide for Non-Filers back taxes and unfiled returns

unfiled tax Most of us have to pay taxes to the IRS each year. Even when we don’t owe taxes, we usually need to still file a tax return to prove to the IRS that we don’t owe anything. As a result, the majority of working Americans have to file a tax return. But what happens if we don’t? Several things can happen, including the IRS sending out a CP59 Notice. 

Key Takeaways: IRS CP59 Notice Guide

  • ✔ Non-Filer Alert: The IRS issues a CP59 when they believe you have failed to file a required tax return.
  • ✔ Response Form: Most responses require Form 15103 to explain why a return was not filed or to submit the missing return.
  • ✔ Penalty Risk: Failure-to-file penalties accrue at 5% per month, which is significantly higher than failure-to-pay rates.
  • ✔ Substitute Returns: Ignoring this notice may lead the IRS to file a Substitute for Return (SFR), often resulting in a higher tax bill.
  • ✔ The 8-Week Rule: If you filed within the last 8 weeks, the notice may have crossed in the mail and can likely be disregarded.

What Is the IRS CP59 Notice?

This is a type of tax notice that the IRS sends to those who the IRS believes should have filed one or more tax returns, but didn’t. The IRS can send this to almost any taxpayer but has recently focused on sending these out to higher-income individuals. This includes sending out more than 25,000 notices to individuals the IRS believes have more than $1 million in income and 100,000 notices to individuals with $400,000 to $1 million in income. In many cases, the CP59 Notice will be the first document you receive from the IRS letting you know that you might have a missing tax return. If you receive this notice, it should have information about what you can do to properly respond based on whether or not you agree with the IRS. 

Penalties for Not Filing Tax Returns 

Even though the CP59 may be the first of several notices the IRS sends you about an unfiled tax return, you need to respond to it as quickly as possible. There are several reasons for this, the most notable being the potential for penalties and interest. If you have any unpaid taxes stemming from a tax year that’s missing a tax return, the IRS may charge you a failure-to-file penalty in addition to the failure-to-pay penalty. The failure-to-file penalty is 5% of any unpaid tax balance. This 5% penalty accrues each month, with a maximum penalty of 25%. The failure-to-pay penalty is only 0.5%, but it increases to 1% after a certain period of delinquency and can also get up to 25% of your tax due. Don’t forget that the IRS also charges interest on any unpaid tax balance or late penalty. For instance, say that your tax due from an unfiled return is $10,000. The penalties alone can bring the balance to $15,000, and interest accrues daily on the assessed tax and penalties. 

Form 15103: Responding to CP59 

IRS Form 15103, Form 1040 Return Delinquency will probably form the basis of your response to the CP59 notice. How you complete this form will depend on your response to the IRS’ position that you need to file a tax return. If you acknowledge the IRS is correct in sending you CP59, then you need to complete your missing tax returns as soon as possible.  If you believe the IRS is incorrect in concluding you have a missing tax return, then you must explain why using one of two options. The first option is to complete Form 15103, as there are sections that allow you to explain why you don’t feel you need to file a tax return. If you already filed a tax return more than eight weeks ago, you’ll need to send another copy of that return to the IRS when you submit Form 15103. You should also complete this form if you received CP59 on behalf of a deceased person. You can then mail or fax Form 15103 and accompanying documents and/or tax returns to the address or fax number provided on the CP59. There should also be a stub that came with the CP59 notice that you need to include in your Form 15103 filing. If you don’t want to use Form 15103, you can also call the toll-free number located on your CP59 Notice. Before making this call, make sure you have any information or documents nearby that will support your position that you don’t have a missing tax return. One thing to note about Form 15103 is that you don’t need to fill it out if your CP59 concerns a tax return you filed within the last eight weeks. In this very specific scenario, you can ignore the CP59 Notice. Generally, if you get CP59 and you’ve just filed, the IRS simply sent out the notice before processing your return, but you may want to double-check that the agency received your return before you throw away the notice.

How Much Time Do I Have to Respond to the CP59 Notice? 

There’s no real time limit to respond to the CP59. If you wait too long to respond, you’ll most likely see the IRS sending you additional notices about your unfiled returns, such as a CP516 Notice. Even though there’s not usually any immediate risk of financial harm following the receipt of a CP59 Notice, you still need to respond as quickly as you reasonably can. If you end up owing taxes when filing the missing return, you’ll accrue additional penalties and interest by not responding sooner with the missing return. And if it turns out the IRS owes you money with a tax credit or refund from the same tax year that’s missing a return, it doesn’t have to send the money to you unless you file the missing return first.

What Happens If I Don’t Respond to a CP59 Notice from the IRS? 

As mentioned earlier, if you filed the missing tax return within the last eight weeks, you can ignore the IRS CP59 Notice. Otherwise, don’t ignore it, as you could run into one or more problems with the IRS. One such problem is owing more money in taxes than you should otherwise. When the IRS believes you should file a tax return and you don’t (despite repeated reminders to do so), they will likely prepare a substitute for return, or SFR. This is where the IRS takes information from third parties about your income (like an employer forwarding your W2 information to the IRS automatically) and files a tax return for you. Sounds nice, doesn’t it? What might seem like a generous act at first is anything but. When the IRS prepares an SFR, they’ll be missing information about your financial situation. For example, maybe you had a child and lost money on stocks the year you didn’t file a tax return. Because you didn’t file a return, the IRS won’t know to prepare your SFR to include a dependent and deduct your capital losses from taxable income. As a result, your SFR will indicate you owe more taxes than you really do. Another problem is that if the SFR results in the IRS thinking you owe taxes, they’ll begin the tax collection process. This can eventually result in you receiving a Notice of Deficiency. 

What Is a Notice of Deficiency?

A Notice of Deficiency is a document from the IRS that explains how the IRS believes you have unpaid taxes. One of the most common of these notices is the CP3219N Notice of Deficiency. This document explains that the IRS never received your tax return, the IRS prepared an SFR for you, and the IRS determined you owe taxes it’s now trying to collect. If you receive a CP3219N and disagree with the IRS’ proposed tax assessment, you have 90 days to file any missing tax returns, call the IRS to explain why you never had to file the allegedly missing tax return, or file a petition with the U.S. Tax Court to legally challenge the tax assessment. You can see how responding to the CP59 Notice makes more sense and can prevent a small tax issue from turning into a major one. 

Options for Those Unable to Pay Taxes 

If you didn’t file a tax return because you didn’t feel you could afford to pay the tax bill that came with it, you still need to file the missing return. As discussed above, not filing a missing tax return can turn into a bigger tax problem with interest and penalties that start increasing your tax balance. Filing the missing return when the IRS filed a substitute for return will likely result in a smaller tax bill for you to pay. Even if filing the missing tax returns lowers your tax bill, it could still be too high for you to immediately pay off. That’s okay, as there are other options available. If you’re facing extreme financial hardship, you might be eligible for an offer in compromise or having your tax account placed in currently not collectible status. For situations where you have money to pay off your taxes, but need extra time, there are ways to pay your tax debt over several months with an IRS payment plan or installment agreement. 

When to Hire a Tax Professional 

If you’re like many taxpayers who receive a CP59 Notice, you can probably respond to it without any outside help. Maybe a call to the IRS to help explain your situation or answer any basic questions you have about Form 15103 is all that you’ll need to do. But there could be circumstances where you need the help of a tax professional such as one from Seattle Legal Services, PLLC. You can contact us online or call us at 206-895-7268 to speak with one of our tax professionals. We can help you determine if you need to file a return and if not, what evidence you can provide the IRS to convince them of this. Or maybe it’s clear you need to file a tax return, but you’re not sure how to do so or need help setting up a payment plan. Either way, we can help you reach the best possible outcome for your unique tax problem.