WASHINGTON — Tens of thousands of wealthy Americans are not complying with recently revamped Internal Revenue Service efforts to get them to file tax returns, according to data obtained exclusively by CNBC.
A quirk in federal tax law may be incentivizing wealthy people who want to avoid paying taxes to simply not file their returns. That’s because it’s a felony to file false tax returns but only a misdemeanor not to file a return 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 face prosecution. As a result, many millionaires could simply be taking their chances, betting that they will face few consequences for not filing their tax returns.
In early 2024, the IRS began an effort to contact people it calls “high income non-filers” and urge them to file returns to the tax agency.
“We have made progress,” an IRS official told CNBC, explaining that high net worth cases can take time to process. “That said, there still remains a lot of work. We continue to pursue these folks. This is not work that we will let go.”
Renewed investigation
Notices were mailed in February in 125,000 cases targeting wealthy taxpayers who had not filed tax returns since 2017.
These were cases in which the IRS had received third-party information — such as through Forms W-2 and 1099 — indicating that these people received income of more than $400,000 but failed 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 staff limitations made it impossible to pursue many of these cases, the agency has said.
With the new law’s funding, 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 report, during the first six months of this initiative, nearly 21,000 of these wealthy non-filing taxpayers filed returns, resulting in an additional $172 million in taxes being paid.
And in the three months since the September report, the IRS official told CNBC, the number of non-filers who have filed returns jumped from 21,000 to 26,000 and the total tax revenue collected from these filers had risen to $292 million.
Some of the taxpayers who received formal alerts, known as CP59 notices, had not filed returns for multiple years. So the total number of delinquent taxpayers is likely smaller than the total number of notices that were mailed out.
The IRS said it believes the total amount of income from these taxpayers is more than $100 billion. At a minimum, the agency expects that hundreds of millions of dollars are owed by these same people in back taxes.
At least $1 million in income
Yet despite the additional resources, the IRS still has not had significant success in persuading the very wealthy to file tax returns, according to the data, which was provided to CNBC by an aide to Senate Finance 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 more than $1 million in suspected income — had filed returns.
And so far, at least, it does not appear that many of these very wealthy non-filers are facing legal consequences for their failure to meet their civic and legal obligations.
According 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 Department 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 list 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 explained this relative lack of enforcement against these thousands of noncompliant millionaires.
“Both the DOJ and [IRS Criminal Investigation] have limited resources, and in most cases, those resources are used to investigate and prosecute felonies. Therefore, the likelihood of criminal investigation and prosecution of non-filers is significantly low,” the agency wrote.
“Non-filers prosecuted for a misdemeanor violation have a low probability of receiving a meaningful sentence of incarceration, which counters the agency’s mission to initiate criminal investigations that have the highest likelihood of substantial deterrent effect,” the IRS told the Senate panel.
More than $5 million in income
Some of the individuals who are not filing tax returns are spectacularly wealthy, according to the data provided to CNBC.
Of the roughly 25,000 wealthiest non-filers identified 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 file a return.
In the approximately 10 months since these taxpayers making $5 million-plus received their warning notices, just 551 of them have filed returns, according to the data given to the Senate.
Felony proposals
According to the Treasury Department, one way to increase federal revenues would be to increase the criminal penalties on chronic non-filers.
Treasury has proposed that the misdemeanor offenses of certain non-filers should be reclassified as felonies.
Under current law, a person who owes federal taxes and fails to file a tax return can only be charged with a misdemeanor in most cases. If they are convicted, the misdemeanor offense is punishable by a term of imprisonment of not more than one year, and a fine of not more than $250,000, or $200,000 in the case of a corporation, or both.
But according to the Treasury’s new proposal, “any person who willfully fails to file timely required tax returns in any three years” out of five, and whose unpaid tax bill in that five-year period adds up to at least $250,000, “would be subject to a new aggravated failure-to-file criminal penalty.”
In these cases, the offense would be classified as a felony, and would be punishable by a term of imprisonment of no more than five years, a fine of up to $250,000, or $500,000 in the case of a corporation, or both.
“Non-compliance by high-income taxpayers has a significant corrosive effect on tax administration and collection,” Treasury wrote in the proposal to reclassify the offenses.
The department noted that wealthy people who do not pay their taxes shift the burden of financing the federal government to other taxpayers.
“Increasing criminal penalties for high-income people who willfully and repeatedly do not file a tax return would provide a more effective deterrent to such blatant tax evasion, encourage voluntary compliance and help close the tax gap,” Treasury wrote.
