Owing taxes ordinarily is not a crime, but not filing when you have a legal duty to do so is a federal misdemeanor punishable by one year in jail for each year that is delinquent plus penalties. The IRS, with its vast resources, is a relentless, all-searching government agency. Some people think, “If I just don’t file a tax return, well then the IRS doesn’t have anything to monitor, and I can escape their radar.”
This sort of reasoning is a bit like entering a ticket into the “Hunger Games,” because each non-filing increases the chances the IRS will catch you. I’ve not seen the film (or read the books) yet, but I’m told by my staff that the setting in Hunger Games involves a bleak future where food is rationed by the government (apparently everything economic is government-run), and people are nearly starving. To obtain more food, a person may voluntarily enter his or her name in a raffle. However, if your name is chosen, you have the lucky non-option of fighting to the death against another. Now’s here’s the catch: each time you enter your name, it stays in the “pot,” which increases the odds of it getting picked.
Non-filing is a bit like that. The IRS has software–very powerful software–to monitor 250 million people in the United States, and many others abroad who are subject to U.S. income tax, to ensure that those with a tax liability do, in fact, file and pay their tax liability. This software apparently complies various and variegated pieces of information to determine whether you owe a duty to the government to file a tax return.
The software will consider, for example, whether a taxpayer has stopped filing returns (or have never filed returns) by comparing information obtained from third parties against IRS records (i.e. 1099s and W-2s). For more on how the IRS identifies non-filers, see: How does the IRS identify non-filers?
The non-filing monitoring not limited to individuals, either. Businesses are also monitored. In fact, recently the Government Accounting Office (GAO), in its Report to the Committee on Finance before the Senate, came up with a new plan of how it would crack down on non-filing businesses. It would take a sample of the inventory and make some reasonable extrapolations on that. According to the Report, the
The IRS could develop a partial estimate using its business nonfiler inventory. The IRS typically identifies several million potential business nonfilers each year, more than it can thoroughly investigate. The IRS could take a random sample of its inventory, thoroughly investigate those cases, and use the results to estimate the proportion of actual nonfilers in its inventory of potential nonfilers.