IRS crackdown on wealthy Americans faces hurdles

WASHINGTON — Tens of thousands of wealthy Americans are not in compliance recently improved The Internal Revenue Service is working to get people to file their tax returns, according to data obtained exclusively by CNBC.

A quirk in the federal tax code may provide incentives for wealthy people who want to avoid paying taxes not to file. That’s because filing a false tax return is a felony, but not filing a return at all is only a misdemeanor.

Additionally, the IRS and Department of Justice have limited resources to pursue misdemeanor violations, so those who don’t file returns are unlikely to be prosecuted. As a result, many billionaires may simply be taking chances, betting that there will be little repercussions if they don’t file their tax returns.

In early 2024, the IRS began an effort to contact what it called “high-income non-filers” and encourage them to file returns with the tax office.

“We’ve made progress,” an IRS official told CNBC, explaining that wealthy cases can take longer to process. “That being said, there is still a lot of work left. We will continue to pursue these people. This is not a job we will let go of.”

Notices were mailed in February 125,000 items It targets wealthy taxpayers who have not filed a tax return since 2017.

The IRS received third-party information, such as through Form W-2 or 1099, indicating that these people earned more than $400,000 and did not file a tax return. It was a case.

Prior to the Inflation Control Act of 2022, the IRS’ nonfiler program had been in place sporadically since 2016, but severe budget and staffing constraints made it impossible to pursue many of these cases. the department said.

With funding from the new law, the IRS has the resources to perform this core tax administration task and will begin efforts to identify non-filers in fall 2023, the report said.

In the first six months of the initiative, nearly 21,000 of these wealthy unfilers filed returns, resulting in an additional $172 million in returns, according to a September report. It is said that taxes have been paid.

And in the three months since the September report, the number of non-filers who have not filed a return has jumped from 21,000 to 26,000, and the total tax revenue collected from these filers has increased. The amount has increased to $292 million, an IRS official told CNBC.

Some taxpayers who received formal warnings, known as CP59 notices, had not filed returns for multiple years. Therefore, the total number of delinquents may be less than the total number of notices mailed.

The IRS said it believes the total revenue from these taxpayers is more than $100 billion. The agency estimates these people will have to pay at least hundreds of millions of dollars in unpaid taxes.

But despite the additional resources, the IRS continues to file tax returns for the very wealthy, according to data provided to CNBC by an aide to Senate Finance Committee Chairman Ron Wyden (D-Ore.). I have not had much success in persuading people to do so.

As of August, of the approximately 25,000 high-income nonfilers who received CP59 warning notices this year, only those with suspected incomes above $1 million had filed returns. There were only 5,460 people.

And, at least for now, it does not appear that many of these extremely wealthy non-filers face legal liability for failing to fulfill their civil and legal obligations.

According to a Senate aide, the IRS told the committee that it was “premature to tell” how many of these unfilers have been referred to the Justice Department for criminal investigation.

However, as of October 28, 2024, only 62 public tax audits had targeted individuals on the IRS Criminal Investigation’s list of 25,000 millionaire non-filers. This is approximately one-quarter of a 1% investigation rate.

In an email to a Senate committee provided to CNBC, the IRS explained the relative lack of enforcement against these thousands of illegal millionaires.

“The Department of Justice also [IRS Criminal Investigation] Resources are limited, and most of the time those resources are used to investigate and prosecute felonies. Therefore, the likelihood of a criminal investigation and prosecution of non-filers is extremely low,” the agency wrote.

“A nonfiler charged with a misdemeanor violation is unlikely to receive a meaningful prison sentence, which contradicts the agency’s mission to initiate criminal investigations that are most likely to have a substantial deterrent effect,” the IRS said in the Senate. stated in the committee.

Some individuals who don’t file tax returns are surprisingly wealthy, according to data provided to CNBC.

Of the approximately 25,000 wealthiest non-filers identified by the IRS, approximately 2,000 may have earned more than $5 million in any given tax year for which they did not file a return.

Only 551 taxpayers earning more than $5 million filed their returns in about 10 months after receiving the warning notice, according to data presented to the Senate.

According to the Ministry of Finance, there are several ways to do so: increase federal revenue It will likely strengthen criminal penalties for those who chronically do not file a tax return.

The Ministry of Finance proposed Misdemeanors of certain non-filers should be punished Reclassified as a Felony.

Under current law, people who owe federal taxes and fail to file a tax return are almost always charged only with misdemeanors. If convicted, misdemeanors are punishable by up to one year in prison and a fine of up to $250,000, or $200,000 for a corporation, or both.

However, according to the Treasury Department’s new proposal, “a person who willfully fails to file a required tax return in a timely manner during any three of a five-year period, and the amount of unpaid tax for that five-year period is at least Those who reach $250,000 are Subject to newly increased criminal penalties for non-filing. ”

In such cases, the crime is classified as a felony, punishable by up to five years in prison, a fine of up to $250,000 or $500,000 for corporations, or both.

“Noncompliance by high-income taxpayers has a significant adverse impact on tax administration and collection,” the Treasury Department wrote. suggestion This is to reclassify crimes.

The department noted that wealthy people who do not pay taxes shift the burden of funding the federal government onto other taxpayers.

“Strengthening criminal penalties for high-income individuals who intentionally and repeatedly fail to file tax returns would be a more effective deterrent to such blatant tax evasion, encourage voluntary compliance, and close the tax gap. ,” the Treasury Department wrote.