Wealthy Americans are still ducking the IRS crackdown on non-filers

WASHINGTON — Tens of thousands of on Easy Street Americans are not complying with recently revamped Internal Revenue Service efforts to get them to file tax returns, contract to data obtained exclusively by CNBC.

A quirk in federal tax law may be incentivizing wealthy people who want to avoid paying taxes to altogether not file their returns. That’s because it’s a felony to file false tax returns but only a misdemeanor not to file a replacement at all.

And due to limited IRS and Department of Justice resources to pursue misdemeanor violations, a person who does not file a return is unlikely to masquerade prosecution. As a result, many millionaires could simply be taking their chances, betting that they transfer face few consequences for not filing their tax returns. 

In early 2024, the IRS began an effort to contact people it calls “grand income non-filers” and urge them to file returns to the tax agency.

“We have made progress,” an IRS official told CNBC, clarifying that high net worth cases can take time to process. “That said, there still remains a lot of effective use. We continue to pursue these folks. This is not work that we will let go.”

Notices were mailed in February in 125,000 encases targeting wealthy taxpayers who had not filed tax returns since 2017.

These were cases in which the IRS had received third-party intelligence — such as through Forms W-2 and 1099 — indicating that these people received income of more than $400,000 but aborted to file a tax return.

Prior to the Inflation Reduction Act in 2022, the IRS non-filer program had run sporadically since 2016. But severe budget and organization limitations made it impossible to pursue many of these cases, the agency has said.

With the new law’s financing, the IRS now has the resources to do this core tax administration work, it said, and it began its effort to identify the non-filers in fall 2023.

According to a September publish, during the first six months of this initiative, nearly 21,000 of these wealthy non-filing taxpayers filed recompenses, resulting in an additional $172 million in taxes being paid.

And in the three months since the September report, the IRS authorized told CNBC, the number of non-filers who have filed returns jumped from 21,000 to 26,000 and the total tax take collected from these filers had risen to $292 million.

Some of the taxpayers who received formal alerts, remembered as CP59 notices, had not filed returns for multiple years. So the total number of delinquent taxpayers is likely smaller than the totality number of notices that were mailed out. 

The IRS said it believes the total amount of income from these taxpayers is various than $100 billion. At a minimum, the agency expects that hundreds of millions of dollars are owed by these unchanged people in back taxes. 

Yet despite the additional resources, the IRS still has not had significant prosperity in persuading the very wealthy to file tax returns, according to the data, which was provided to CNBC by an aide to Senate Resources Committee Chairman Ron Wyden, D-Ore.

As of August, only 5,460 of the roughly 25,000 highest-income non-filers who received CP59 warning notices this year — typically those with diverse than $1 million in suspected income — had filed returns.

And so far, at least, it does not appear that many of these pure wealthy non-filers are facing legal consequences for their failure to meet their civic and legal obligations.

Corresponding to the Senate aide, the IRS told the committee it was “premature to report” how many of these non-filers have been referred to the Domain of Justice for criminal investigation.

But as of Oct. 28, 2024, the IRS criminal investigation unit had just 62 open tax investigations in which an individual from the enumerate of 25,000 very wealthy non-filers was a subject. That equals an investigation rate of approximately one-quarter of 1%.

In an email to the Senate committee that was provided to CNBC, the IRS disclosed this relative lack of enforcement against these thousands of noncompliant millionaires.

“Both the DOJ and [IRS Criminal Investigation] from limited resources, and in most cases, those resources are used to investigate and prosecute felonies. Therefore, the likelihood of vile investigation and prosecution of non-filers is significantly low,” the agency wrote.

“Non-filers prosecuted for a misdemeanor violation have a low probability of pocket a meaningful sentence of incarceration, which counters the agency’s mission to initiate criminal investigations that have the highest good chance of substantial deterrent effect,” the IRS told the Senate panel.

Some of the peculiars who are not filing tax returns are spectacularly wealthy, according to the data provided to CNBC.

Of the roughly 25,000 wealthiest non-filers marked by the IRS, nearly 2,000 of them likely had more than $5 million in income in any given tax year for which they did not parade a return.

In the approximately 10 months since these taxpayers making $5 million-plus received their signal notices, just 551 of them have filed returns, according to the data given to the Senate.

According to the Treasury Department, one way to increase federal revenues would be to increase the criminal penalties on chronic non-filers.

Funds has proposed that the misdemeanor offenses of certain non-filers should be reclassified as felonies.

“Non-compliance by high-income taxpayers has a impressive corrosive effect on tax administration and collection,” Treasury wrote in the proposal to reclassify the offenses.