Tens of thousands of wealthy Americans are not complying with the Internal Revenue Service’s (IRS) efforts to get them to file tax returns, according to data obtained exclusively by CNBC.
A quirk in federal tax law may be encouraging wealthy individuals to avoid paying taxes by not filing returns. It is a felony to file false tax returns, but only a misdemeanor not to file a return at all. Due to limited IRS and Department of Justice resources, a person who does not file a return is unlikely to face prosecution, leading many millionaires to take their chances and avoid filing.
The IRS began an effort in early 2024 to contact people it calls “high-income non-filers” and urge them to file returns. So far, the agency has made progress, with 21,000 of the 125,000 high net worth cases having filed returns and an additional $172 million in taxes being paid. However, a large number of these individuals have not filed returns, and the IRS is working to pursue them.
Despite the efforts, many of these high-income non-filers are not facing legal consequences. As of August, only 5,460 of the 25,000 highest-income non-filers who received CP59 warning notices had filed returns. The IRS criminal investigation unit had only 62 open tax investigations involving an individual from the list of 25,000 very wealthy non-filers.
The agency expects the total amount of income from these taxpayers to be more than $100 billion at a minimum, and hundreds of millions of dollars are owed by these same individuals in back taxes. However, a proposal by the Treasury Department to reclassify certain non-filer offenses as felonies could increase federal revenues and encourage compliance.
These proposals aim to increase the criminal penalties on chronic non-filers and reclassify certain offenses as felonies. The Treasury Department states that increasing criminal penalties for high-income individuals who willfully and repeatedly do not file a tax return would provide a more effective deterrent to such blatant tax evasion and encourage voluntary compliance.
