IRS Missing Return Notices: CP59, CP516, CP518, and What Happens Next
An IRS CP59, CP516, or CP518 notice means the IRS does not have a record of one or more required federal income tax returns.
The notices become progressively more serious.
A CP59 generally tells an individual taxpayer that the IRS has no record of a prior year personal income tax return. A CP516 is a follow up reminder. A CP518 is described by the IRS as a final reminder.
If the issue remains unresolved, the IRS can move beyond reminder notices and calculate tax using information reported by employers, financial institutions, businesses, and other third parties.
What Does an IRS CP59 Notice Mean?
The IRS sends CP59 when its records show that a prior year individual income tax return has not been filed.
Receiving CP59 does not necessarily prove that the taxpayer failed to file.
Possible situations include:
- The return was never filed
- The return was filed but has not finished processing
- A paper return was mailed but the IRS has no record of processing it
- An electronically filed return was rejected
- The taxpayer filed under incorrect identifying information
- The IRS believes a return was required when the taxpayer believes there was no filing requirement
- A return was prepared but never successfully transmitted or mailed
The distinction matters because a taxpayer who already filed a valid return may need to establish filing and processing rather than prepare a second return.
What Is a CP516 Notice?
CP516 is a later reminder.
The IRS states that it sends CP516 after a previous notice when it still has no record that the prior year return was filed.
By this point, the taxpayer should determine whether the return was previously filed, whether the IRS is identifying the correct tax year, and whether other unfiled years may also exist.
What Is a CP518 Notice?
CP518 represents a more serious stage of the nonfiler process.
The IRS describes CP518 as its final reminder that it still has no record of the taxpayer's prior year return or returns.
If the taxpayer does not respond, the IRS states that it may determine the tax itself. Penalties and interest may continue to accrue, and refunds can be delayed because of outstanding filing requirements.
The IRS Can Eventually Calculate the Tax Without Your Return
IRC Section 6020(b) authorizes the IRS to prepare a return when a person fails to file a required return.
This is commonly called a substitute for return, or SFR.
The IRS can use information available to it, including wages and other income reported by third parties.
The taxpayer may later receive CP2566, which tells the taxpayer that the IRS has calculated tax, penalties, and interest based on information reported by employers, financial institutions, and others.
The IRS can then move toward a statutory Notice of Deficiency, including CP3219N in individual nonfiler cases.
Why an IRS Substitute for Return Can Overstate the Tax
An IRS substitute for return is not the same as a properly prepared delinquent tax return.
The IRS is working from information available to it. That information may establish gross income without establishing all of the facts that reduce the taxpayer's actual tax liability.
Depending on the taxpayer, the IRS calculation may not properly reflect items such as:
- Business expenses
- Cost basis
- Capital losses
- Rental expenses
- Depreciation
- Certain deductions
- Certain tax credits
- Prior year carryforwards
- Other facts that require information from the taxpayer
Current IRS examination procedures recognize that substitute returns generally do not allow deductions and credits that have not been established by the taxpayer, subject to specific rules such as the standard deduction for individuals.
This is one reason an accurately prepared delinquent return can produce a materially different result from accepting an IRS calculated liability.
Filing Your Own Return Can Still Matter After the IRS Prepares One
The IRS expressly states that even after it prepares a substitute return, it is generally still in the taxpayer's interest to file an actual delinquent return.
The IRS will generally adjust the account to reflect the correct figures when a valid return is subsequently filed and processed.
Once the IRS has progressed to CP2566 or a statutory Notice of Deficiency, however, the response should address both the delinquent return and the notice that is already outstanding.
Do You Have to File Every Missing Tax Year?
This is an area where the IRS rules are frequently oversimplified.
IRS Policy Statement 5-133 provides administrative guidance for enforcing delinquent return filing requirements.
Under current Internal Revenue Manual procedures, the IRS will normally pursue filing compliance for a six year period.
The IRS can require a longer or shorter period depending on the taxpayer's history, the extent of the noncompliance, expected tax liability, compliance considerations, and other facts.
Current IRS procedures state that enforcement beyond the normal six year period can occur with managerial approval.
Accordingly, someone with many unfiled years should not assume that filing exactly six years automatically resolves the entire problem.
An Unfiled Return Does Not Start the Normal Assessment Limitation Period
IRC Section 6501 normally provides the IRS a limited period after a return is filed to assess additional tax.
But IRC Section 6501(c)(3) provides that when no return is filed, tax may generally be assessed at any time.
The ordinary assessment limitation period therefore does not begin merely because the original filing deadline passed.
What If You Believe You Already Filed the Return?
The first step is to determine whether the return was actually received and processed by the IRS.
Relevant evidence can include:
- Electronic filing acknowledgments
- Rejection notices
- Certified mail records
- Proof of mailing
- Copies of signed returns
- IRS account transcripts
- IRS return transcripts
- Payment records associated with the return
- Prior IRS correspondence
Current IRS guidance generally tells CP59, CP516, and CP518 recipients that no additional action is required when the return was filed within the preceding eight weeks.
If considerably more time has passed, the filing history should be investigated before another return is submitted.
What If You Were Not Required to File?
Not every missing return notice necessarily means a tax return was legally required.
A filing requirement depends on the tax year and the taxpayer's circumstances, including income, filing status, self employment activity, and other statutory filing requirements.
The response should establish why no return was required rather than simply ignore the notice.
Reconstructing an Older Tax Return Can Require More Than an IRS Transcript
IRS transcripts can be extremely useful when original records are missing.
A wage and income transcript may show Forms W-2, Forms 1099, Forms 1098, and other information reported to the IRS.
An account transcript can help establish whether a return posted, whether payments were made, and what activity occurred on the tax account.
But IRS transcripts do not necessarily contain everything needed to prepare a correct return.
For example, an information return may show gross brokerage proceeds without complete basis information, gross business receipts without deductible expenses, a retirement distribution without all facts needed to determine taxable treatment, or real estate proceeds without adjusted basis.
A transcript is therefore often the beginning of the reconstruction, not the finished tax return.
Missing Business Records Can Make the Review More Complex
An older delinquent return can become substantially more complicated when the taxpayer operated a business.
Records may need to be reconstructed from:
- Bank statements
- Credit card statements
- Accounting software
- Merchant processor statements
- Payroll records
- Forms 1099
- Prior depreciation schedules
- Loan documents
- Vehicle records
- Real estate records
- Entity tax returns
The IRS may know the business received income without knowing the expenses required to determine net taxable income.
What Penalties Can Apply to an Unfiled Return?
Depending on the facts, an unfiled return can result in additions to tax and interest.
IRC Section 6651 includes the failure to file and failure to pay additions to tax.
A substitute return prepared by the IRS under IRC Section 6020(b) does not eliminate the taxpayer's failure to file penalty exposure.
Section 6651(g) also contains special rules treating a qualifying IRS substitute return as a taxpayer filed return for purposes of certain failure to pay additions.
Penalty relief should therefore be evaluated separately from preparation of the delinquent return.
For additional information, see IRS Penalty Abatement: Reasonable Cause, AEP and First Time Abatement.
Filing a Return and Paying the Tax Are Separate Issues
A taxpayer should not delay filing a required return simply because the full tax cannot immediately be paid.
The filing requirement and the payment obligation are separate.
Filing the correct return establishes the taxpayer's actual liability and can prevent continued nonfiler enforcement.
Once the amount is known, the unpaid balance can be addressed separately.
A Missing Return Can Hold Up a Refund
The consequences of an unfiled return are not limited to taxpayers who owe money.
The IRS can hold a refund when its records show one or more required returns have not been filed and the IRS believes additional tax may be due.
There are also statutory limits on recovering refunds and certain credits from older years.
What Happens After CP518 If Nothing Is Filed?
The exact notice sequence can vary, but the IRS identifies a progression that can include:
CP59
The IRS has no record of the prior year personal tax return.
CP516
The IRS previously contacted the taxpayer and still has no record of the return.
CP518
The IRS describes this as the final reminder.
CP2566
The IRS calculates proposed tax, penalties, and interest using third party information.
CP3219N
The IRS issues a statutory Notice of Deficiency in the nonfiler case.
If the matter progresses to an assessment and remains unpaid, normal IRS collection procedures can follow.
Can a CPA Handle Missing Return Notices?
Yes.
A CPA who is eligible to practice before the IRS can represent a taxpayer in federal tax matters through an appropriate Form 2848 authorization.
But representation is only one part of a nonfiler engagement.
The work can also involve:
- Determining which returns are actually required
- Obtaining IRS transcripts
- Reconstructing income and deductions
- Preparing delinquent returns
- Reconciling estimated tax and withholding payments
- Reviewing substitute return assessments
- Evaluating penalties
- Correcting the taxpayer's filing status with the IRS
- Addressing balances after the returns have been processed
When Does a Missing Return Notice Merit Professional Review?
Professional review can be particularly useful when:
- More than one tax year is missing
- You believe the return was already filed
- The IRS claims a return was required but you disagree
- The IRS has issued CP516 or CP518
- The IRS has already calculated tax through CP2566
- Business or self employment income is involved
- Original records are incomplete
- Brokerage, real estate, or basis information must be reconstructed
- Partnership or S corporation income is involved
- There are substantial estimated payments or withholding credits
- The IRS substitute return appears to overstate the tax
- Significant penalties have accrued
- Several years of federal and state returns must be coordinated
The objective is to establish the correct filing requirements, prepare accurate returns, and bring the account into compliance based on the taxpayer's actual facts.
Key Takeaway
CP59, CP516, and CP518 indicate that the IRS believes a required federal return is missing.
If the issue remains unresolved, the IRS can calculate the tax using third party information and move toward substitute return and deficiency procedures.
For taxpayers with multiple unfiled years or incomplete records, the important questions are which returns are required, what information is needed to prepare them accurately, what the IRS has already done on the account, and what penalties or balances may result.
For professional assistance reviewing missing return notices, reconstructing prior year tax information, and responding to IRS nonfiler issues, see my IRS Notice Review and Response Services.
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