The IRS expects everyone to file an annual tax return, on Form 1040, 1040A or 1040EZ. If they have no record of receiving one of these forms from you, they will let you know with a Verification of Non-Filing Letter. This letter explains that they never received a filing from you and that you are on a list of non-filers.
The letter is generated not by a human IRS process but by database matches.
Do not ignore the letter
Al Capone, who was imprisoned at Alcatraz for non-filing, can tell you this is not a good message to receive.
Failure to file and failure to pay are the two commonest offenses tracked by the IRS. There is no statute of limitations on charges of non-filing. Non-filing for a single tax year is treated as a criminal misdemeanor. Non-filing for multiple tax years may result in criminal felony charges.
The database that decides who to investigate for non-filing is tilted toward different types of people:
The database may indicate you are involved with organized crime, public corruption or involvement in drug trade. These are lines of work that do not yield legal or reportable income.
The database may select you because of circumstances that the IRS finds suspicious. Your occupation and schooling may suggest you knew better than to fail to file. Lawyers, CPA (inactive), financial advisers and public officials are often caught in this net. If the IRS believes you knew non-filing was wrong, you may be charged criminally, and not as a civil or administrative charge.
If you appear on a list of proclaimed tax resisters or protesters, or individuals who are known to have made false statements to the IRS in the past, you are likely vulnerable.
When you get the letter, you can expect to be subjected to a thorough review. What is frustrating is that, for years, the IRS lumped true non-filers together with people who applied for an extension in their reporting. Many people have felt targeted for investigation when all they did was ask for the extension, which millions of people lawfully do.
The IRS is run mostly by computer databases, which sift through tens of millions of returns for omissions and commissions.
Databases make mistakes
They usually cannot tell, by running your name through the database, why you failed to file. In most cases, it is a matter of forgetfulness, or lack of funds to write a check. Struggling businesses often elect to pay their landlord first, and the IRS later. This prioritization is not a good idea, but taxpayers in distress often take that route.
If you get the letter advising you that you are on the failure to file list, find the best tax lawyer you can. He or she is your best hope of an acceptable outcome.