Millionaires Dodge IRS Crackdown: A Growing Tax Gap
Tens of thousands of wealthy Americans are avoiding their tax obligations, choosing not to file returns despite increased IRS scrutiny, according to exclusive data obtained by CNBC. A loophole in federal tax law, where failing to file is a misdemeanor (a lesser offense) while filing a fraudulent return is a felony (a far more serious offense), seems to be encouraging this behavior. Limited resources at the IRS and Department of Justice make prosecution of misdemeanor non-filers unlikely, essentially creating a system where the wealthy can gamble on avoiding consequences. This article delves into the alarming scale of this tax evasion and the ongoing efforts – and their limitations – to address it.
Key Takeaways: The Billionaire Tax Evasion Scandal
- Tens of thousands of high-income Americans are not filing tax returns, despite earning hundreds of thousands, or even millions, of dollars.
- A loophole favors non-filing: It’s a misdemeanor to not file, whereas filing a false return is a felony, resulting in minimal prosecution of non-filers.
- The IRS, boosted by the Inflation Reduction Act, is actively pursuing these individuals, but success has been limited, particularly among the wealthiest.
- The Treasury Department is proposing to reclassify repeat non-filing as a felony to deter this egregious tax evasion.
- The staggering amount of unpaid taxes is estimated to be over $100 billion.
Renewed IRS Investigation: A Limited Success
Following the passage of the Inflation Reduction Act of 2022, the IRS received significant funding, allowing it to launch a large-scale initiative targeting “high-income non-filers.” In February 2024, the agency mailed out 125,000 notices (CP59 notices) to individuals with incomes exceeding $400,000 who hadn’t filed returns since 2017. The IRS leveraged third-party information like W-2 and 1099 forms to identify these individuals. While this effort showed some initial success, with 26,000 non-filers submitting returns generating $292 million in additional tax revenue by October 2024, the overall impact remains limited.
The Challenges of Enforcement
Despite the IRS efforts, the agency acknowledges the significant challenges it faces. The sheer volume of cases, coupled with the complexity of pursuing high-net-worth individuals, creates substantial logistical and resource constraints. An IRS official confirmed to CNBC that, while progress is being made: “there still remains a lot of work. We continue to pursue these folks.”
Focusing on the Millionaires: A Disappointing Response
Data provided to CNBC by an aide to Senator Ron Wyden, Chairman of the Senate Finance Committee, paints a concerning picture. By August 2024, only 5,460 out of approximately 25,000 high-income non-filers (with over $1 million in suspected income) had filed returns after receiving CP59 notices. This represents a dismal compliance rate.
The Lack of Legal Consequences
Even more worrying is the apparent lack of legal repercussions for the vast majority of non-compliant millionaires. The IRS reported to the Senate committee that it was “premature to report” on the number of referrals to the Department of Justice for criminal investigation. However, the available data reveals that, as of October 28, 2024, only **62 open tax investigations** involved individuals from this group of 25,000 high-income non-filers – a staggeringly low investigation rate of approximately one-quarter of 1%. The IRS clarified this low number by stating that: “Both the DOJ and [IRS Criminal Investigation] have limited resources, and in most cases, those resources are used to investigate and prosecute felonies.”
The Ultra-Wealthy: A Growing Problem
The problem extends beyond those with $1 million in income. Among the approximately 25,000 top non-filers identified, nearly 2,000 are suspected to have had annual income exceeding $5 million. Even ten months after receiving warnings, fewer than 600 of these individuals had submitted tax returns.
Proposed Felony Reclassification: A Potential Solution?
The Treasury Department recognizes the severity of this persistent tax evasion and proposes a significant change in the law to address the situation. In their proposal, they advocate for reclassifying repeated willful failure to file taxes as a felony, particularly for those with substantial unpaid tax liabilities.
The Current Misdemeanor Penalties
Currently, the penalty for failing to file a tax return is a misdemeanor, with a maximum penalty of one year in prison and a $250,000 fine (or $200,000 for corporations).
Treasury’s Proposed Felony Penalties
The Treasury’s proposal introduces a new felony charge for individuals who willfully fail to file taxes in at least three out of five years, and who owe at least $250,000 in unpaid taxes during that five-year period. The proposed penalties are increased dramatically: up to five years in prison and a $500,000 fine (or $250,000 for individuals). The Treasury stated that: “Non-compliance by high-income taxpayers has a significant corrosive effect on tax administration and collection.” They argue that increased penalties will act as a more effective deterrent against tax evasion, ensuring fairer tax distribution and closing the significant tax gap.
The situation highlights a critical flaw in the current tax system where the penalty for not filing – a misdemeanor – is significantly less severe than for filing a fraudulent return – a felony. While the IRS is attempting to address the issue, the scale of the problem and the limited resources available to pursue legal action against the ultra-wealthy raise serious concerns about fairness and the integrity of the tax system. Ultimately, the success of the Treasury’s proposal to reclassify repeated tax evasion as a felony will be crucial in deterring this costly form of tax avoidance.
