Will be in touch, IRS tells high-earning nonfilers

Thousands of high-income earners have not filed tax returns for several years, but the cash-strapped Internal Revenue Service did nothing to get them to pay what they owe.

That changes now, the tax agency announced Thursday. The IRS will send notices to thousands of people who made more than $400,000 and did not file returns in at least one year from 2017 to 2022, the first step to collecting any tax owed.

About 25,000 cases involve people whose income is known to the agency to be above $1 million, IRS Commissioner Danny Werfel said. About 100,000 instances stem from people with income from $400,000 to $1 million, as reported to the IRS by their employers and banks.

Although the IRS will send out 125,000 notices, the actual number of taxpayers involved may be fewer, as many of them failed to file in multiple years.

If they don’t file within about two months of getting the letters, the IRS can take further action, including eventually filing a “substitute” tax return on the person’s behalf and then levying money from their paycheck or bank account to collect the taxes owed.

“When people don’t file their taxes, they need to know there’s a consequence,” Werfel said.

Failing to file one year can lead to a snowballing effect, a lawyer said. “They forget one year, and then the next year, they say, ‘Well, if I file now, I’ll get in trouble for the year before,’ … Pretty soon, 15 or 20 years later, they’re in a lot worse trouble,” said Rob Kovacev, a former Department of Justice attorney who said that more than 15 years ago, before IRS budget cuts, his docket was full of nonfiler cases, some for very rich people.

As Congress reduced the IRS’ funding over the past decade, the agency’s shrinking staff did less to enforce tax compliance — including one of the most basic tasks, simply sending letters to people who fail to file their tax return. Werfel said the “nonfiler program” last operated in 2016, with only sporadic attempts since then to contact nonfilers.

He described that lapse as “one of the clearest examples of the need to have a properly funded IRS.” In 2022, Congress granted the agency an additional $80 billion over 10 years, though Republicans in Congress later clawed back $20 billion. The agency went on a hiring spree last year, which Werfel said gives the IRS enough workers to contact nonfilers and process the returns once they’re filed, or pursue further action against those who don’t file.

Werfel said the returns represent hundreds of millions of dollars in unpaid taxes, on more than $100 billion of income.

Few of the 125,000 missing returns will lead to criminal tax evasion cases.

Thursday’s announcement reflects the Biden administration’s decision to focus tax-compliance efforts on high-income earners. The administration has said it will not increase audit rates for taxpayers who earn under $400,000 a year.

Eventually, the IRS said, it will send letters to nonfilers at all income levels. The letters for people making less than $400,000 will focus on the fact that they might be missing out on a refund. More than 1 million households annually miss out on credits they can claim, such as the Earned Income Credit, because they didn’t file a tax return, the IRS said.