Washington According to information obtained exclusively by CNBC, tens of thousands of affluent Americans are not filing their taxes in spite of the Internal Revenue Service’s recently redesigned efforts to do so.
It’s possible that a peculiarity in federal tax law encourages affluent individuals who wish to evade paying taxes to just refrain from filing their forms. The reason for this is because filing false tax returns is a crime, but failing to file a return at all is simply a misdemeanor.
Additionally, a person who does not file a return is unlikely to be prosecuted because the IRS and Department of Justice have limited resources to pursue misdemeanor offenses. much billionaires may thus be taking a chance and hoping that there won’t be much repercussions for failing to file their taxes.
The IRS started contacting people in early 2024, calling high-income non-filers and urging them to submit returns to the tax office.
An IRS official told CNBC that although processing high net worth cases can take some time, we have made progress. Still, a lot of work needs to be done. We’re still after these people. We will not abandon this task.
Renewed investigation
In February, 125,000 boxes of notices were delivered to affluent taxpayers who hadn’t filed taxes since 2017.
In several instances, the IRS obtained information from third parties, such as Forms W-2 and 1099, showing that the individuals in question earned over $400,000 but neglected to file a tax return.
Since 2016, the IRS non-filer program operated intermittently until the Inflation Reduction Act of 2022. However, the agency has stated that many of these instances could not be pursued due to significant budget and staff limits.
The IRS stated that it now has the capacity to carry out this essential tax administration task thanks to the financing provided by the new law, and it started working to identify the non-filers in the fall of 2023.
Nearly 21,000 of these wealthy non-filing taxpayers submitted returns within the first six months of this campaign, resulting in an additional $172 million in taxes paid, according to a September report.
According to the IRS official who spoke to CNBC, the number of non-filers who have filed returns has increased from 21,000 to 26,000 in the three months since the September report, and the total amount of tax money collected from these filers has increased to $292 million.
Formal alerts, also referred to as CP59 notices, were sent to some taxpayers who had not filed returns for several years. Therefore, it is likely that there are fewer overdue taxpayers overall than there were notices mailed out.
According to the IRS, it estimates that these people have earned over $100 billion in total. The government anticipates that these same individuals owe hundreds of millions of dollars in past taxes, at the very least.
At least $1 million in income
According to the data, which was given to CNBC by an aide to Senate Finance Committee Chairman Ron Wyden, D-Ore, the IRS has yet to make a substantial impact on getting the very rich to file tax forms, even with the increased resources.
Only 5,460 of the approximately 25,000 highest-income non-filers who were sent CP59 warning notifications this year—typically those with probable income over $1 million—had filed taxes as of August.
Furthermore, it doesn’t seem like many of these extremely rich non-filers are currently experiencing legal repercussions for their failure to fulfill their legal and civic duties.
The Senate aide claims that the IRS informed the committee that it was too soon to disclose the number of non-filers who had been submitted to the Department of Justice for criminal inquiry.
However, as of October 28, 2024, there were only 62 active tax investigations involving a subject from the list of 25,000 extremely rich non-filers in the IRS criminal investigation section. That is equivalent to a quarter of a percent investigation rate.
This relative absence of enforcement against these thousands of noncompliant millionaires was explained by the IRS in an email to the Senate committee that was given to CNBC.
The limited resources available to the DOJ and [IRS Criminal Investigation] are often utilized for felony investigations and prosecutions. As a result, the agency stated that there is very little chance that non-filers will be the subject of a criminal inquiry and prosecution.
The IRS informed the Senate panel that non-filers who are prosecuted for a misdemeanor offense are unlikely to receive a significant jail sentence, which runs opposed to the agency’s goal of starting criminal investigations that have the best chance of having a significant deterrent effect.
More than $5 million in income
According to the information given to CNBC, some of the people who do not file tax returns are extremely wealthy.
Nearly 2,000 of the approximately 25,000 wealthiest non-filers that the IRS identified probably earned more than $5 million in any given tax year for which they failed to submit a return.
According to the statistics provided to the Senate, only 551 of the taxpayers earning $5 million or more have filed returns in the roughly ten months since they received their warning notifications.
Felony proposals
The Treasury Department claims that tougher criminal penalties for persistent non-filers would be one approach to boost federal income.
Treasury has suggested reclassifying some non-filers’ minor charges as felonies.
A person who owes federal taxes and does not file a tax return can typically only be charged with a misdemeanor under current law. Should they be found guilty, the misdemeanor charge carries a maximum sentence of one year in jail, a maximum fine of $250,000 (or $200,000 for corporations), or both.
However, the Treasury’s current plan would impose a new aggravated failure-to-file criminal penalty on anyone who deliberately fails to file timely necessary tax returns in any three of the five years and whose unpaid tax debt during that five-year period totals at least $250,000.
Under these circumstances, the offense would be considered a felony and carry a maximum sentence of five years in prison, a fine of up to $250,000 (or $500,000 in the case of a corporation), or both.
In the proposal to reclassify the offenses, Treasury stated that non-compliance by high-income taxpayers had a corrosive effect on tax administration and collection.
The agency pointed out that the responsibility of funding the federal government is transferred to other taxpayers by wealthy individuals who fail to pay their taxes.
“It would be more effective to deter such blatant tax evasion, encourage voluntary compliance, and help close the tax gap if high-income individuals who willfully and repeatedly fail to file a tax return were subject to increased criminal penalties,” the Treasury stated.
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