How Wealthy Americans Are Outsmarting the IRS Crackdown on Non-Filers

The Internal Revenue Service (IRS) is facing significant challenges as tens of thousands of high-income Americans evade filing their tax returns.

Loopholes in Tax Law Encourage Non-Compliance

Shared data reveals that many wealthy individuals exploit a legal loophole, which treats filing false tax returns as a felony but considers failing to file altogether as a misdemeanor. With limited IRS and Department of Justice resources to address misdemeanors, the likelihood of prosecution remains low.

This imbalance has incentivized some individuals to forgo filing their returns, banking on minimal consequences. The issue gained renewed attention in 2024 when the IRS launched an initiative targeting “high-income non-filers.” Notices were sent to 125,000 individuals who had earned over $400,000 annually but failed to file tax returns since 2017. Despite these efforts, the agency admits that progress has been slow, as addressing high-net-worth cases requires significant time and resources.

Renewed Focus Yields Modest Results

Backed by the Inflation Reduction Act, the IRS has expanded its capacity to pursue non-filers, achieving some progress. By September 2024, approximately 21,000 non-filers had submitted their returns, resulting in $172 million in collected taxes. This figure rose to $292 million by late October, with an additional 5,000 returns filed during that time. However, these results are modest compared to the estimated $100 billion in total unreported income among these taxpayers.

Among the wealthiest individuals targeted, compliance remains notably low. Of the 25,000 taxpayers suspected of earning over $1 million annually, fewer than 5,500 had filed their returns. The situation is even starker for those earning over $5 million annually: only 551 of the nearly 2,000 non-filers in this category submitted returns after receiving warnings. The IRS acknowledges that legal action against these individuals has been minimal, with only 62 active criminal investigations as of late October.

Proposed Solutions and the Path Forward

The Treasury Department has proposed increasing criminal penalties for chronic non-filers to deter high-income tax evasion. Under current law, failing to file is punishable by a maximum one-year prison term and a $250,000 fine for individuals. The new proposal recommends reclassifying repeated failures to file, involving at least $250,000 in unpaid taxes over five years as a felony. Such offenses would carry harsher penalties, including up to five years of imprisonment and higher fines.

Treasury officials argue that these changes are crucial to preserving the integrity of the tax system. Wealthy non-filers not only undermine tax compliance but also shift the financial burden to compliant taxpayers. Stricter penalties, they assert, would encourage voluntary compliance and reduce the tax gap.

While the IRS has made strides in addressing non-compliance, the road ahead is long. Enhanced enforcement and legislative reforms may be necessary to ensure the wealthiest Americans fulfill their civic and legal responsibilities, safeguarding the nation’s financial infrastructure.