I rarely meet someone who doesn’t wish they could pay less taxes. A new initiative from the IRS could make that wish a reality… eventually.

One reason some Americans pay so much in taxes is the tax gap—the difference between what Americans owe and what they actually pay. The IRS estimates the tax gap to be roughly $496 billion, resulting from people underreporting income, overstating credits and deductions, underpaying the taxes they owe, and not filing a return.

The IRS hopes to close that gap by addressing the last category: non-filers.

How big is the non-filing problem?

According to the Journal of Accountancy, over 125,000 high-income taxpayers—those with incomes over $400,000 annually—have let their federal income tax returns gather dust since 2017.

Roughly 25,000 of those taxpayers have estimated income over $1 million, and the remaining 100,000 have income between $400,000 and $1 million.

How does the IRS know about them? The IRS receives information returns, such as W-2s and 1099s, for these people every year, and those information returns indicate that these potential tax-dodgers have enough income to necessitate filing a return but have chosen not to for one reason or another.

Who needs to file, anyway?

Generally, if your income exceeds certain thresholds, the IRS expects a tax return from you.

In general, if you earn less than the standard deduction available for your filing status, you likely don’t need to file a return. However, there are exceptions, such as dependents and people with self-employment income over $400.

You can find the threshold for filing a return for each tax year in IRS Publication 501 or use the IRS’s interactive Do I Need to File a Tax Return? tool.

The likelihood of needing to file is high for high-income individuals, especially those with W-2s, 1099s, and other information returns on file.

Non-Filers to Receive IRS Notices

The IRS recently received a bolstered budget thanks to the Inflation Reduction Act of 2022, and it’s devoting some of that windfall to addressing the issue of high-income non-filers head-on.

The agency plans to send notices to roughly 125,000 high-income Americans who haven’t filed a tax return since 2017. Recipients of these notices must either file a federal income tax return or respond to the IRS explaining why they’re not required to file.

Generally, taxpayers receiving these notices have eight weeks to respond. If they miss that deadline, they could face an IRS audit or, in more severe cases, criminal prosecution

The Price of Procrastination

The penalties for not filing a return can be daunting.

Generally, the IRS charges a failure-to-file penalty on tax returns filed after the due date unless the taxpayer can prove reasonable cause for non-filing, such as a fire, natural disaster, or death or serious illness of the taxpayer or their immediate family.

The failure-to-file penalty is 5% of the unpaid tax bill for each month or partial month the return is late. That fee is capped at 25% of the unpaid tax bill.

That’s not the only penalty delinquent filers might face. The IRS also charges a failure-to-pay penalty of 0.5% of the unpaid tax bill for each month or partial month the tax liability isn’t paid in full. This penalty is also capped at 25% of the unpaid tax bill.

If both penalties apply, the IRS reduces the failure-to-file penalty by the amount of the failure-to-pay penalty.

The IRS also charges interest on the outstanding balance. For the first and second quarter of 2024, that rate is currently 8% per year, compounded daily.

Beyond the penalties and interest, the IRS may take matters into its own hands by filing a substitute for return (SFR). This is hardly ideal, as it often results in a higher tax bill because the IRS bases that return only on the information it receives from informational returns. Since it doesn’t have information on business expenses, charitable deductions, out-of-pocket medical expenses, and other write-offs, those aren’t reflected on the SFR.

Get Help with Tax Compliance from NewWay Accounting

Even with the best intentions, people sometimes fall behind on their tax filing obligations. If you’re in that boat, don’t put off filing any longer.  

You don’t have to face your back tax obligations alone. Contact NewWay Accounting for help determining whether you need to file, catching up on your tax filing obligations, and potentially saving you from hefty penalties and legal headaches.

Whether you’ve received an IRS notice or simply want to ensure your tax affairs are in order, professional guidance can make all the difference.