Non-filers among wealthy Americans continue to evade the IRS's enforcement efforts.

• Numerous affluent Americans are refusing to submit their tax returns in response to the IRS's updated regulations.
• "An IRS official informed CNBC that they will persist in pursuing those individuals, stating, "This task will not be abandoned.""
• Federal tax law contains a quirk that may motivate wealthy individuals to evade taxes by not submitting their returns.

According to exclusive data obtained by CNBC, tens of thousands of wealthy Americans are not complying with the recently revamped Internal Revenue Service efforts to get them to file tax returns.

Not filing tax returns is a misdemeanor, while filing false returns is a felony, which may be encouraging wealthy individuals to evade taxes.

Due to limited resources of the IRS and Department of Justice to pursue misdemeanor violations, many millionaires are likely to take their chances and not file their tax returns, with few consequences.

The IRS started contacting "high income non-filers" in early 2024 to encourage them to submit tax returns.

"An IRS official informed CNBC that high net worth cases require time to process, but progress has been made. Despite this, there is still much work to be done, and the IRS will continue to pursue these cases. "This work will not be abandoned," the official stated."

Renewed investigation

In February, 125,000 notices were sent to wealthy taxpayers who had not filed tax returns since 2017.

People who failed to file a tax return despite receiving income of more than $400,000 were identified through third-party information such as Forms W-2 and 1099.

Since 2016, the IRS non-filer program has been running sporadically. However, due to severe budget and staff limitations, the agency was unable to pursue many of these cases prior to the Inflation Reduction Act in 2022.

The IRS has started identifying non-filers with the new law's funding, it said, and it will continue this core tax administration work in fall 2023.

Nearly 21,000 wealthy non-filing taxpayers filed returns during the first six months of the initiative, resulting in an additional $172 million in taxes being paid, according to a September report.

Since the September report, the number of non-filers who have filed returns has increased from 21,000 to 26,000, resulting in a total tax revenue collection of $292 million.

The total number of delinquent taxpayers may be less than the total number of CP59 notices sent out, as some taxpayers who received these notices had not filed returns for several years.

The IRS expects that hundreds of millions of dollars are owed by these taxpayers in back taxes, with a total income from them exceeding $100 billion.

At least $1 million in income

Although the IRS has more resources, it hasn't been successful in convincing the wealthy to file tax returns, according to data from an aide to Senator Ron Wyden, D-Ore.

In August, only 5,460 of the 25,000 highest-income non-filers who received CP59 warning notices had filed returns.

Despite being wealthy, many non-filers have not faced legal consequences for not fulfilling their civic and legal obligations.

The Senate aide stated that the IRS informed the committee that it was too early to disclose the number of non-filers who have been referred to the Department of Justice for criminal investigation.

As of Oct. 28, 2024, the IRS criminal investigation unit had 62 open tax investigations involving individuals from a list of 25,000 very wealthy non-filers. This represents an investigation rate of approximately one-quarter of 1%.

The IRS explained in an email to the Senate committee why there is a lack of enforcement against thousands of noncompliant millionaires.

The DOJ and IRS Criminal Investigation have limited resources and primarily focus on investigating and prosecuting felonies. As a result, the likelihood of criminal investigation and prosecution of non-filers is low.

The IRS informed the Senate panel that non-filers who are prosecuted for a misdemeanor violation have a low chance of receiving a significant sentence of incarceration, which contradicts the agency's objective of launching criminal investigations that have the greatest potential to deter crime.

More than $5 million in income

According to CNBC's data, some of the individuals who are not filing tax returns are incredibly wealthy.

Nearly 2,000 of the 25,000 wealthiest non-filers identified by the IRS likely had more than $5 million in income in any given tax year for which they did not file a return.

Since the taxpayers earning over $5 million received their warning notices 10 months ago, only 551 of them have filed their returns, as per Senate data.

Felony proposals

The Treasury Department suggests that raising the criminal penalties for persistent non-filers could boost federal revenues.

The treasury has suggested reclassifying certain non-filers' misdemeanor offenses 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 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.

According to the Treasury's new proposal, a person who fails to file timely required tax returns in any three out of five years and owes at least $250,000 in unpaid taxes during that period will face a new aggravated failure-to-file criminal penalty.

If the offense is classified as a felony, it will be punishable by a maximum prison term of five years, a fine of up to $250,000, or $500,000 for corporations, or both.

The proposal to reclassify offenses stated that non-compliance by high-income taxpayers has a significant corrosive effect on tax administration and collection, as written by the Treasury.

Other taxpayers bear the burden of financing the federal government due to wealthy individuals who evade paying taxes.

The Treasury believes that increasing criminal penalties for high-income individuals who repeatedly fail to file tax returns would be a more effective deterrent to tax evasion, promote voluntary compliance, and help close the tax gap.