IRS implements new enforcement measures in bid to crack down on tax cheats

The IRS is getting serious about going after rich tax cheats, announcing a string of new enforcement measures in recent weeks aimed at wealthy Americans not paying what they owe in taxes.

The latest is a series of reminder letters aimed at high earners who simply declined to fill out a tax return, a group the IRS refers to as “non-filers.”

The IRS will send 25,000 letters to non-filers making more than $1 million a year, and 100,000 letters will be sent to non-filers making between $400,000 and $1 million annually, IRS Commissioner Danny Werfel told reporters on a call Thursday.

The noncompliance letters, referred to by the IRS as CP59 notices, will extend as far back as 2017 for people who haven’t filed tax returns.

“The IRS knows who these non-filers are,” Werfel said. “The IRS has the third-party information, such as through forms W2 and 1099, indicating these people received significant income but failed to file a tax return. The IRS has known these people are out there, and they involve some very prosperous households.”

The IRS believes there are hundreds of millions of dollars in unpaid taxes held by recipients of the letters, though Werfel didn’t provide a specific estimate. He also didn’t give data on the efficacy of CP59 notices, though he did say notices have a “very positive return on investment.”

There are about 10 million people who don’t file a tax return each year, according to various estimates, many of whom are on the lower end of the income spectrum.

But many business taxpayers also fail to file returns, which could make up a significant portion of the $688 billion in tax revenue that goes uncollected every year and adds to the national deficit.

The Treasury Inspector General for Tax Administration found problems in 2017 with how the IRS designates non-filers, identifying 314,586 business taxpayers with $335.5 billion in form 1099-K income “that appeared to have a filing obligation, but went unidentified … as non-filers by the IRS.”

IRS enforcement has been on the decline in recent years. Audit rates dropped across all tax brackets between 2010 and 2019, according to the Government Accountability Office, but they fell most sharply for the wealthiest taxpayers.

For people making more than $5 million a year, audit rates plummeted 86 percent over the last decade, from more than 16 percent of individual returns to below 4 percent. 

By comparison, rates fell by 76 percent for people making between $25,000 and $200,000 a year, and by 61 percent for people making less than $25,000 over the same time period.

The IRS says it hasn’t been pursuing non-filers in the past due to a lack of staff and agency resources, a trend the IRS intends to buck with roughly $60 billion in additional funding to be spent over the next nine years as a result of Democrats’ Inflation Reduction Act.

“The IRS had to back off core compliance work on non-filers. Due to severe budget and staff limitations, the IRS non-filer program has only run sporadically since 2015,” Werfel said Wednesday.

Non-filers could face additional penalties or criminal prosecution for failing to pay taxes. They could also have substitute tax returns created on their behalf from third-party data.

The initiative on non-filers follows a string of new audits announced for people who use company jets for personal purposes while failing to log the trips as income, another tax dodge for rich people that the agency is seeking to root out.

Between three and four dozen audits aimed at corporate jet fliers will be carried out in the coming weeks, IRS officials announced last week.