Overview of IRS Notice CP518

The IRS Collection Procedure Notice 518 (CP518) is a notification that the IRS believes a taxpayer—either a business or an individual—has failed to file a required return, either as of the initial deadline for filing or as of any extension deadline. Pursuant to 26 U.S.C. § 6212 and Treasury Regulation § 301.6212-1, the IRS uses CP518 as one of various progressive notifications to taxpayers for tax assessment or collection process. See IRS Guidance for CP 518 Business and IRS Guidance for CP 518 Individual.

Last Known Mailing Address

Pursuant to Section 6212, if the IRS determines that there is a deficiency in respect of any federal income tax, including any excise tax authorized by Chapter 42 of the Internal Revenue Code, the IRS is authorized to send a notice of deficiency to the taxpayer by certified mail or registered mail. The CP518 notice must include a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office.

Documentary evidence of the IRS mailing a CP518 notice to the taxpayer’s last known address is sufficient that a notice of deficiency was properly mailed. See 26 U.S.C. § 6212(b); Treasury Regulation § 301.6212-1(b). If a taxpayer has a legitimate basis to claim that a CP518 notice was not properly delivered, the taxpayer may challenge a CP518 notice on that basis. However, a taxpayer’s unsupported statement of “I don’t recall receiving the notice” is usually an argument that is rejected by the U.S. Tax Court. See Golditch v. Comm’r, T.C. Memo. 2022-26 (March 29, 2022); see also Freeman Law Insights Blog on Golditch.

Pause, But Take Action To Give to (or File With) Ceasar What Is His, If And As Required By The Internal Revenue Code

Any return that was required to be filed but was not should be prepared and filed with the IRS, even if delinquent. The IRS Guidance for a CP518 conveys a sense of urgency or immediacy to file whatever return was required to be filed but was not. But, haste often causes “nasty things.”

A taxpayer is wise to pause, closely evaluate what tax returns were required and were or were not filed, and prepare accurate returns as required to comply with tax filing obligations. The individual taxpayer who receives a CP518 must also complete and submit IRS Form 15103 (Form 1040 Delinquency), explaining why the taxpayer filed late, does not have to file, or already filed all required returns. A portion or stub connected with the CP 518 must be submitted with the Form 15103. Business entity taxpayers will likewise be asked–usually through the CP518–to complete and submit a similar explanatory response form that accompanies the CP518.

The “pause” on filing a delinquent return should be reasonable so that the IRS does not itself prepare and file a substitute for return, which the IRS is authorized to do (and under no particular timeline). A dilatory or acquiescent attitude is not recommended.

Substitute For Return

Where a taxpayer fails to file a required return, the IRS may prepare, for tax assessment purposes, a substitute for return showing, for example, taxes owed, generally, and additional taxes under section 6651. See 26 U.S.C. § 6020(a) (“If any person shall fail to make a return required . . . the [IRS] may prepare such return . . . ”); id. at § 6651(g)(2) (authorizing additions to tax in substitute for return). In addition, if no return is filed and the IRS prepares a substitute return, then the taxpayer has made no election for deductions and may not later claim itemized deductions. See Salter v. Comm’r, T.C. Memo. 2022-9 (April 5, 2022); George v. Comm’r, T.C. Memo. 2019-128, 118 T.C.M. (CCH) 294, 296, aff’d per curiam, 821 F. App’x 76 (3d Cir. 2020); see Zaklama v. Comm’r, T.C. Memo. 2012-346, 104 T.C.M. (CCH) 760, 777.

Unless a taxpayer can prove that the failure to file a return is due to reasonable cause and due to willful neglect, an additional tax may be assessed, and the IRS’s burden of proof to sustain the assessment determined in a substitute for return is not onerous. See 26 U.S.C. § 6664.  To establish reasonable cause, the taxpayer must show that it exercised ordinary business care and prudence’ but nonetheless was unable to meet its obligations.  U.S. v. Boyle, 469 U.S. 241, 245-46 (1985).

Insights

It is very important that a taxpayer receiving a CP518 notice act quickly but prudently to address the situation before it gets worse. If a taxpayer refuses or fails to prepare and file a required return, the IRS may itself prepare and file a substitute for return, and in that event, the taxpayer will be disadvantaged from claiming, for example, available itemized deductions and other lawful offsets to tax liability as allowed by the Internal Revenue Code. Indeed, the law–even the Internal Revenue Code, at times–helps those who help themselves, the vigilant, rarely the sleeping, and never the acquiescent. If a taxpayer receives a CP518, acquiescence is ill-advised. Upon receipt of CP518, evaluate, connect with competent professionals, if and as needed, and take charge of the potential tax filing and liability that the IRS believes is outstanding.

Have a question? Contact Cory Halliburton, JD.