What Happens If You Don’t File Taxes?
Every day I talk to people who haven’t filed their taxes — sometimes for one year and sometimes for multiple years.
And the IRS has in fact stated that they are increasing their focus on taxpayers who don’t file. They say:
“The Internal Revenue Service announced it will visit more taxpayers who haven’t filed tax returns for prior years in an effort to increase tax compliance and further enforce the law. In addition, the IRS is increasing the use of data analytics, research and new compliance strategies, including personal visits, to reach taxpayers and tax return preparers who have not filed federal tax returns. The goal of these strategies is to bring delinquent taxpayers into compliance with their filing and payment tax obligations and promote future tax compliance.”
And in this article I’m going to explain what happens if you don’t file taxes.
And there are two ways to answer that question. The first way has to do with procedures — what happens procedurally within the IRS when somebody does not file a tax return. So I will start by answering that question.
The second way to answer the question, “What happens if you don’t file taxes?” has to do with consequences — what will happen to you if you don’t file taxes.
So at the end of the article, I will discuss some consequences to individuals if they don’t file their taxes.
And there are both tax-specific consequences such as penalties and interest and loss of refund, but there are also non-tax consequences such as potential loss of future Social Security benefits or inability to get a loan because the lender wants your tax returns and even potentially jail time — I’ll get into all the consequences later in this article.
But let’s start with the procedures — procedurally, what happens at the IRS if you don’t file taxes?
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What Happens If You Don’t File Taxes?
To explain what the IRS does procedurally when somebody doesn’t file their taxes, you must first understand why the IRS cares about unfiled tax returns in the first place.
Why Does the IRS Care About Unfiled Tax Returns?
So why does the IRS care about unfiled tax returns? The IRS cares about unfiled tax returns because the IRS, as the nation’s federal tax collection service, wants to collect taxes.
But in order to collect a tax, the IRS must first assess the tax.
Assessment is the statutorily required recording of a taxpayer’s tax liability in the government’s books — in the government’s accounts receivable.
Internal Revenue Manual Section 184.108.40.206 says, “Assessment is made by recording the taxpayer’s name, address, and tax liability.”
Before the IRS can collect a tax from a taxpayer, it must first assess the tax — it must record the amount of the taxpayer’s tax liability. Otherwise, how much tax would the IRS know they need to collect from a particular taxpayer?
They would have no idea without assessing that tax first. So that is why the IRS cares about unfiled tax returns — because it needs to assess a taxpayer’s tax liability so that it can collect on it.
And typically the IRS assesses a tax on a taxpayer when that taxpayer files their tax return and on that tax return it says, “This is the amount of my total tax, this is the amount of payments I’ve made and refundable credits I’m eligible for, and this is the amount of tax liability I owe for this year based on this tax return.”
When you file a tax return, you’re telling the IRS how much you owe them or if they owe you in which case the IRS would say, “OK, we don’t need to collect tax from this taxpayer; we need to pay them a refund.”
But that’s the typical scenario: The taxpayer files their tax return, and the IRS assesses the tax on the government’s books.
But by not filing a tax return, that chain is broken; the IRS cannot assess the tax in the usual way; and so it has procedures in place to ensure that they are still able to assess the tax despite the individual not filing a tax return.
And at a high level, these procedures are as follows:
- First, to secure a tax return from the taxpayer. They’re going to inform the taxpayer and send them notices and perhaps even visit the taxpayer physically to convince them to file a tax return.
- And then, if that doesn’t work, the IRS will prepare a tax return for the taxpayer for them called a substitute for return (SFR).
So I’m going to talk about these procedures in turn, but first I want to mention IRS Policy Statement 5-133, which says this:
“Taxpayers failing to file tax returns due will be requested to prepare and file all such returns [unless there’s an indication of fraud]…Normally, application of [this] criteria will result in enforcement of delinquency procedures for not more than six (6) years.”
What this is basically saying is that the IRS will generally not enforce the procedures I’m going to talk about for unfiled tax returns for more than six tax years; so for most tax compliance purposes, when it comes to unfiled federal tax returns — because states can have different procedures about their own tax returns — in general, the IRS won’t look past six years for unfiled tax returns or to prepare substitute tax returns beyond six years ago.
Now let’s get into these IRS procedures — what does the IRS do when it notices that a taxpayer has not filed a tax return that they would have expected they should have filed based on tax documents filed by third parties with the IRS such as 1099s and W-2s?
Securing a Valid Voluntary Tax Return
So the first thing the IRS will do procedurally when someone hasn’t filed a tax return is to attempt to convince that taxpayer to file a tax return.
And for the majority of cases, this involves the IRS sending a Notice CP59 to the taxpayer’s last-known address.
And the CP59 is basically just the IRS telling the taxpayer:
- They didn’t file a tax return for the tax year on the notice.
- They should file their tax return immediately for that tax year if they are required to file.
- They should pay the tax due, if any, indicated on that tax return that they file.
The CP59 will typically have a Form 15103 included with it that, if applicable, the taxpayer can use to explain to the IRS why they aren’t required to file a tax return for the year in question or to inform the IRS that they have already filed a tax return for the year in question because sometimes the IRS gets behind when it comes to processing tax returns.
Like I mentioned, this notice — just like all IRS notices — will generally be sent to the taxpayer’s last-known address, which is typically the address the taxpayer used on the last tax return they filed with the IRS unless they filed a Form 8822 “Change of Address” at some point since then or otherwise provided the IRS with their new address.
The IRS does state that they are “required to exercise due diligence to find and use the taxpayer’s last known address”, and in fact the IRS has a 20,000-word section of the Internal Revenue Manual — that’s Section 5.1.18 “Locating Taxpayers and their Assets” — that is devoted to procedures in place the IRS has to locate taxpayers.
It talks about using the internet, looking up county records, DMV records, reaching out to utility companies, the Social Security Administration, the United States Postal Service, and more.
Maybe that’s a topic for a different article, but suffice it to say that the IRS does use tools in its disposal to locate taxpayers, but in my experience the degree of effort the IRS will utilize to locate a taxpayer is directly proportionate to how much the taxpayer owes.
If your liability is relatively low, they’re probably not going to go through much effort to locate you; but if you owe a lot — just spitballing here, but let’s say six figures or more — they may put in some more effort.
For juicier cases, they may visit taxpayers as they said or take other measures, but for most taxpayers they’re not going to do that, and they will just send notices to the taxpayer’s last-known address.
So they’ll send the CP59 letting them know the IRS didn’t receive a tax return for such-and-such year, and if they don’t get a response, then they’ll send the CP515, which says that the IRS sent them a previous notice and they haven’t forgotten about you — you need to look at your tax situation for the year in question and file a tax return if you have a filing requirement.
And then if there is no response to the CP515, the IRS will generally send a couple more notices with increasingly stronger language. The next notice in the sequence is typically the CP516.
And unlike the CP59 and the CP515, which say, “You didn’t file a tax return and you should look into it and file a tax return if you have a filing requirement,” the CP516 says, “You must file this tax return” because “we [the IRS] received information about you from others, [and] this information indicates that you should file a tax return for the tax year [in question].”
So the CP516 is saying that the IRS believes this individual has a filing requirement and that if they don’t file the IRS “may determine [their] tax for [them],” and I’ll talk about how they do that later in this article.
If the individual does not file their return and does not otherwise respond to the CP516, they can expect to receive the CP518, which is the IRS’s final notice to the taxpayer to file their tax return for the year in question or else the IRS may determine their tax for them, with penalties and interest, so they can assess it.
And once the taxpayer does that, the IRS can assess the tax for that year, which is their goal.
Preparing a Substitute For Return (SFR)
But what happens if the IRS sends out that final reminder — the CP518 — and the taxpayer still doesn’t file their return or otherwise reach out to the IRS about their situation?
Well, in this case, the IRS will often — not always, but often — prepare their own tax return for the taxpayer based on tax documents that were filed with the IRS for the taxpayer for the tax year in question.
This is called a substitute for return (SFR), and the IRS’s authority for preparing an SFR for a given tax year is found in Internal Revenue Code Section 6020(b), which states:
“If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary [referring to the Secretary of the Treasury and by extension the entire Treasury Department and by extension the IRS, which is part of the Treasury Department] shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise. Any return so made and subscribed by the Secretary shall be prima facie [meaning accepted as correct unless proven to be incorrect] good and sufficient for all legal purposes.”
So the Internal Revenue Code is law, passed by both houses of Congress and signed by the President; it is not mere IRS policy; the IRS has a bona fide legal right to prepare a tax return — a substitute for return — for a taxpayer who doesn’t file their own tax return or who files a fraudulent tax return.
And the IRS can prepare an SFR for a given year based on information the IRS knows about the taxpayer’s income situation such as their W-2s or 1099s that were filed with the IRS.
And the IRS can assess the taxpayer’s tax liability based on this SFR.
Now, how does the IRS actually create these SFRs? Well, believe it or not, most of them are automatically generated through the IRS’s Automated Substitute for Return Program.
This program was actually suspended for the most part from fall 2015 all the way until May 2019 at least in terms of adding new cases to the Automated Substitute for Return (ASFR) Program, but the program is back in action now with over 100 full-time equivalent employees assigned to it.
Now, not every taxpayer who doesn’t file a tax return will be automatically caught by the ASFR program. There are criteria that must be met, including:
- The tax year is not older than five years prior to the current processing tax year; this is basically in step with Policy Statement 5-133 that I mentioned earlier.
- The proposed tax liability would be more than some minimal amount; the IRS does not disclose this amount in the Internal Revenue Manual; the publicly-available ASFR Criteria section in the Internal Revenue Manual, it redacts that information using the ≡ symbol. But I have heard from some individuals who recently left the IRS that this amount is $500; so there would have to be a potential tax assessment of at least $500 for the tax year, which is not very large.
- There have to be information returns such as W-2s or 1099s filed for the taxpayer, but the number of these documents must be 60 or fewer.
- The tax year is not associated with currently not collectible status or an installment agreement.
And just because a tax year for a given taxpayer meets these criteria doesn’t necessarily mean that that tax year for that taxpayer will be included in the ASFR program. There are in fact simply resource limitations on the program, and the fact of the matter is that certain taxpayers will be a higher priority than others when it comes to having an SFR prepared for them.
And we at Choice Tax Relief have clients everyday who call us and we do our initial investigation and it turns out that even though they didn’t file a return and that tax year met these criteria, the IRS never got around to filing an SFR for them, and since they’re outside the six-year window under Policy Statement 5-133, they likely never will.
Now, I have known revenue officers to refer certain tax years to have an SFR manually created, but even so, that’s not a guarantee that an SFR will actually be prepared.
But how are these SFRs actually prepared? Well, I’ve gone over the process a bit in my article on filing back taxes, but basically the process is not very favorable for taxpayers. SFRs:
- Will include all income reported to the IRS on information returns such as W-2s and 1099s
- Will take the standard deduction and will not consider any itemized deductions
- Will assume that the taxpayer has no dependents
- Will assume that the taxpayer, if unmarried, is filing single and if married is filing married filing separately
- Will not include any deductions or expenses other than the standard deduction
- Often don’t include proper basis on asset sales, especially if the basis of that asset was never reported to the IRS (and sometimes even if it was)
So, for these reasons and others, the Taxpayer Advocate Service — which is an office within the IRS whose primary function is to assist taxpayers with their IRS issues — has been fairly critical of the Automated Substitute for Return Program, stating that:
- The ASFR Program “uses an algorithm that makes assumptions designed to maximize a taxpayer’s liability” and in fact generally overstates it, which it oftentimes does for the reasons I just went over.
- The ASFR yields a poor return on investment because the IRS actually collects on less than 1/3 of the taxes assessed through the ASFR Program.
- The ASFR Program imposes an undue burden on taxpayers and creates rework for the IRS.
And in fact the Taxpayer Advocate Service has recommended changes to the ASFR Program, such as:
- Taking into account deductions that the IRS has information about, such as the mortgage interest deduction, which is reported to the IRS on Form 1098
- Taking into account taxpayers’ prior filing information such as filing status or number of dependents
So the Automated Substitute Return Program is far from ideal, but it’s the world we live in right now.
And before we move on to the second part of this article, which is on the consequences of not filing taxes, I just want to talk briefly about how the IRS actually assesses tax based on SFRs.
So how it works is the SFR is created, and then the IRS will send the taxpayer a 30-day letter, typically Notice 2566.
And this notice basically informs the taxpayer that they must within 30 days of the date of the notice file their tax return or the IRS will assess the liability calculated by them based on the SFR.
And on the first page of the notice, there is the box that we see in many IRS notices stating:
- The IRS’s proposed tax liability based on the SFR
- Any payments or credits against the liability for the year
- Penalties and interest
- Proposed amount due
Of course, the IRS also gives the taxpayer the option of accepting their proposed amount due and paying the amount immediately. To do that, they would check the box and sign the waiver generally on the last page of the notice stating that they agree with the proposed amount due and then below that indicate how they intend to pay the balance.
But at least the IRS is honest and informs the taxpayer that they should “keep in mind that [the proposed] amount may be higher than what [they] would owe if [they] filed their own return.”
And the IRS is also kind enough to break down the IRS’s SFR calculations in the “Proposed tax calculations” section.
If the taxpayer does not respond to this Notice 2566, then the 90-day letter, typically Letter 3219N, will go out. This is the Statutory Notice of Deficiency.
Just like with the 30-day letter, the taxpayer can choose to agree with the IRS’s proposed amount and sign the waiver or they can file their own tax return.
The taxpayer also has the option of within 90 days from the date of the letter to file a petition with the United States Tax Court, and there are instructions on how to do that in the letter itself.
And if the taxpayer does petition the Tax Court, that stops the IRS from being able to assess the tax until the United States Tax Court has made its determination concerning your case. And keep in mind the Tax Court may simply kick your case to appeals.
Tax Court is a whole separate topic that goes beyond the scope of this article, but suffice it to say that you can continue to get the IRS off your back and stop them from assessing the tax and collecting the tax by filing a Tax Court petition.
But very often we find that our clients ignore all these notices and if more than 90 days go by from the date of Statutory Notice of Deficiency, the IRS will then assess the tax — which in their eyes is the whole point of this exercise — and once the assessment process has been completed for the tax year in question, it will move into the collections process and begin sending you those collection notices.
So that’s basically what happens when you don’t file your tax returns from a procedural standpoint with the IRS.
And beyond that, there are repercussions — both tax-related and non-tax-related — to not filing your taxes. And that is what I am going to go over now, ranging from penalties and interest to citizenship roadblocks all the way to an all-expenses paid trip to federal prison.
12 Consequences of Not Filing Taxes
There are many consequences of not filing your taxes, but here are the most common ones in increasing order of severity.
Every day my team and I talk to people who have gotten behind on their tax filing requirements.
And I have not spoken to one yet who is not currently experiencing or has not in the past experienced at least some degree of stress from their tax situation.
And once we work through their issues and file their returns and get them back on track, and we have our final call with them at least concerning their tax returns, most of them say something to the effect of, “Wow, what a relief,” or, “This feels like a burden being taken off my shoulders,” or something like that.
I’ve seen this firsthand; I’ve heard it in the voices of hundreds of clients and prospects over the years; and I know many of you out there know what I’m talking about.
The good news is that this stress can be dealt by simply filing your tax returns or having a professional handle them for you.
2. Interest Accrual
Interest accrual is technically a consequence of not paying your taxes rather than not filing your tax return, but generally people who don’t file don’t pay either.
And if you don’t file, and the IRS prepares a substitute for return for you, the amount on which the interest is based is the amount of tax the IRS thinks you owe based on their SFR.
Of course, if you actually do file your return and you actually owe less than what the IRS thought you did via the SFR, the interest will be recalculated to account for only the amount you actually owed based on your finally-filed tax return.
And that can work the other way as well.
And obviously if you don’t actually owe taxes for the year — if you’re actually owed a refund or you have no balance one way or the other — no interest will accrue, and this whole discussion of interest accrual does not apply to you for that year.
But even if you do owe taxes for a year you didn’t file a tax return, I still have this consequence as the least annoying because right now the IRS interest rate is somewhat low.
The interest rate on an unpaid tax liability is calculated as the federal short-term rate plus 3%. If you’re a C corporation and you owe more than $100,000, it’s the federal short-term rate plus 5%.
But I assume that you’re not a C corporation who owes more than $100,000 to the IRS, so your rate on unpaid taxes is the federal short-term rate plus 3%.
The federal short-term rate is adjusted quarterly; it is currently 1%; and because 1% plus 3% equals 4%, the interest rate on unpaid taxes right now with the IRS is 4%.
Of course, if the federal short-term rate increases, the IRS interest rate will increase as well, but right now 4% isn’t terribly high; that’s lower than a 30-year fixed mortgage right now.
IRS interest is not simple interest; it is in fact compounded daily.
So to put this in perspective, if you owe the IRS $10,000, and the rate stays at 4% compounded daily, you’re looking at in the first year you owe that $10,000 about $440 in interest.
It’s not fun, but $440 compared to $10,000 isn’t necessarily the end of the world; but it can certainly add up. Over five years, the interest on $10,000 at 4% compounded daily would be something like $2,250, which is basically 22.25% of your original balance, and that’s not even including penalties, which I am going to talk about next.
3. Penalty Assessment
Unlike interest, IRS penalties have a limit on how much they can grow to based on your balance with the IRS.
They do, however, accrue a lot faster than interest does, especially if you haven’t filed your tax return.
So most people who don’t file a tax return for a tax year for which they owe taxes to the IRS are looking at two kinds of penalties:
- Failure-to-pay penalty: This penalty is equal to 0.5% of the tax you owe for every month or part of a month it’s not paid after the due date. This penalty maxes out at 25% of your unpaid tax balance.
- Failure-to file penalty: This penalty is equal to 5% of the tax you owe for every month or part of a month you haven’t filed after the due date. This penalty likewise maxes out at 25% of your unpaid tax balance.
If you owe both the failure-to-pay penalty and the failure-to-file penalty, your failure-to-pay penalty will reduce the failure-to-file penalty for each month both are owed so you will never owe more than 5% in combined failure-to-pay and failure-to-file penalties for the same month and your total combined penalties will max out at 47.5% of your unpaid tax balance (25% for failure-to-pay and 22.5% for failure-to-file) after four years and two months from the original due date of your return.
4. Loss of Refund
If the government owes you a refund for the year, you won’t be charged penalties for not filing your tax return since both the failure-to-file penalty and the failure-to-pay penalty are based on the tax you owe.
However, if you don’t file a return within three years of its original due date, you will not be able to get a refund for that return.
5. Inability to Take Out Certain Loans
If you’re looking to get a mortgage or many other kinds of debt, or if you’re looking to refinance existing debt, your lender will very likely want to see at least your last couple years’ of tax returns.
And if you have not prepared them, you will likely not be able to get that financing.
6. Missed Opportunities For Free Money
During the pandemic, my business received a $15,000 grant from my state — I’m not even talking about the federal Paycheck Protection Program (PPP) here; this was free state money.
And this grant was not difficult to obtain; I did not have to show hardship or anything like that; all I had to do was complete an application with the state, and along with that application I had to attach my most recent business tax return.
And just based on the gross revenue shown on my tax return, the state gave me $15,000 in free grant money.
And we saw this a lot with stimulus money. People who hadn’t filed their tax returns in years missed out on all those stimulus checks.
They can still get that money through the Recovery Rebate Credit if they file their tax return before the expiration of the three-year statute of limitations on refunds I discussed previously.
Of course, some people used the IRS Non-Filer Tool to file a zero tax return or more precisely a tax return with a dollar of income when they should have actually filed their true tax return, and we get people who call in every week about that, and we have to amend their returns for them.
But, point is, if the government is ever giving away free money on a large scale again, you probably want to be ready for it, and being ready for it generally involves being compliant with your tax return filings with said government.
7. Citizenship Roadblocks
So if you are not currently a United States citizen but you wish to be, one of the general requirements to become a naturalized United States citizen is good moral character (GMC). And there is an entire part of the U.S. Citizenship and Immigration Services Policy Manual devoted to good moral character.
And this policy manual specifically states that “an applicant who fails to file tax returns, if required to do so, or fully pay his or her tax liability, as required under the relevant tax laws, may be precluded from establishing GMC.”
And the manual builds from there.
And I know this is only relevant to probably a few of you out there who are watching this, but not filing your tax returns certainly has implications when it comes to immigration and naturalization in the United States.
8. Substitute For Return
Like I mentioned previously, if you don’t file your tax returns, the IRS may prepare one for you, and this is called a substitute for return.
And like I said previously, these substitutes for return are generally prepared in a manner that is not very advantageous to the taxpayer.
But nevertheless, the IRS does use them to assess a taxpayer’s tax liability for a given year, which is of course necessary for the IRS to start taking forced collection activity, which is the next consequence.
9. Forced Collection Activity
So if the IRS has determined that you owe them taxes based on their substitute for return that they prepared for you for a particular tax year, and they assess that tax, they will likely start taking forced collection activity.
Now, they’re going to do this based on your substitute for return.
So if the IRS’s substitute for return for a given year says you owe them $10,000, then they will attempt to forcibly collect $10,000 from you, whether through wage garnishments or bank levies or all the other tools the IRS has at its disposal.
And this is true even if you actually are entitled to a refund if you filed your return because, well, you haven’t filed your return.
So unfortunately one of the consequences of not filing your tax returns is the IRS taking collection activity against you based on their substitute for return all the while, if you had just filed your return voluntarily, you would not owe nearly as much as the IRS thinks you do based on the SFR and they may even owe you a refund.
10. Identity Theft
If you don’t file a tax return in your name and Social Security number, somebody else might.
This isn’t super common, but it does happen.
And you can prevent this by actually filing your own tax return because if you file your tax return and then somebody else attempts to file a tax return for that year with your name and Social Security number, that return will be rejected.
11. Potential Loss of Social Security Benefits
So if you know anything about Social Security, you know that if you were born after 1928, you need 40 credits to qualify for Social Security benefits.
As long as you make a minimum amount of money during the year through wages or self-employment income, you are awarded up to four credits for the year.
Right now, that amount is about $1,500 per credit, so if you earned at least $6,000 during the year in wages or self-employment income, you will get the maximum four credits during the year.
Now, if you were an employee and your employer properly reported your wages and all that to the government, then the Social Security administration knows you were working and will give you credits for that year.
But what if you’re self-employed and you never file a tax return? Well, then you won’t accumulate any Social Security credits based on that income if you don’t report those earnings within three years, three months, and 15 days of the end of the year in which you earned that self-employment income.
So the credit calculation is just to qualify for Social Security benefits; but the amount of benefits you receive is based in part on an indexed calculation of your actual earnings. And obviously if your earnings aren’t reported to the government, your benefits may be lower.
Yes, you can go to federal prison for not filing your taxes. Section 7201 of the Internal Revenue Code says:
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution.”
Now, this criminal statute is quite broad; there’s nothing in the statute that says it only applies to taxpayers who evade more than a certain dollar amount in taxes.
However, what this statute does not say is that everybody who doesn’t file a required tax return is guilty of a felony.
A key element here is intent.
It is one thing for a taxpayer to get very sick or go through some traumatic life experience and get behind on their taxes. They wanted to file their taxes; they were not trying to evade or defeat taxes. And they very well likely would have filed their taxes had life not gotten in the way.
That is a very different fact pattern from somebody who has no reason to not file their taxes and who knows that if they reported their true income to the IRS they would likely owe significant taxes and as a result of that doesn’t file a tax return.
Don’t get me wrong — the individual where life got in the way will still likely, if they have a tax liability, be looking at significant penalties and interest for their unfiled tax returns, but that’s probably not a criminal situation.
However, the second individual I described whose reason for not filing taxes was not because they were diagnosed with a terminal illness or something like that but because they simply did not want to pay their taxes — this individual could be a ripe target for the IRS Criminal Investigation Division.
Yes, the IRS has a Criminal Investigation Division — referred to as C.I. — that is comprised of armed and badged federal law enforcement officers called Special Agents, and if you have an accounting background but you’re also interested in law enforcement, they’re actually hiring.
And these IRS Special Agents arrest people for federal tax crimes along with other specific forms of federal financial crimes such as money laundering.
But like I said, a key element of whether or not something is criminal has to do with the individual’s intent.
It’s not like a warrant is automatically issued for everybody who doesn’t file their tax returns; it doesn’t work like that.
I’ll probably do a separate article on how the IRS Criminal Investigation process works, but for now let me just say that it is a very manual process generally involving either a tip from the public or from an IRS auditor (a revenue agent), and then it has to go up two levels up the chain in IRS C.I., and then they have to get IRS Chief Chief Counsel Criminal Tax Attorneys involved, and so on and so forth.
So it’s a manual, costly process to prosecute tax crimes.
And given the IRS’s limited resources, they’re probably only looking at large-dollar-amount or high-profile cases with a high likelihood of conviction.
Like I said, I’ll probably do a deeper dive into IRS Criminal Investigation in another article, but if you just look at the 2021 IRS Criminal Investigation Annual Report, you can see that for fiscal year 2021, “only” 1,372 investigations were initiated for tax crimes, and of those investigations, only 850 resulted in a prosecution recommendation, and only 633 resulting in a conviction and sentencing.
So it’s not like there’s mass incarceration at the federal level for tax crimes.
I don’t say this to encourage non-compliance; like I said, there are certainly civil penalties and issues that arise from not filing your tax returns, but for the average person who gets behind on filing for a few years, there’s likely not a criminal aspect there.