Headline got your attention? No, it isn’t a come-on for a new tax avoidance scheme. Rather, it reflects an interesting but little known problem with the federal income tax system: People who have tax withheld from their paychecks but, for some reason, don’t file returns. For many, ignoring their 1040 means they are paying tax they don’t owe. According to one estimate, in 2003 more than 8 million people had almost $16 billion in taxes withheld but did not file 1040s. Not only did many pay tax they didn’t owe but some likely missed out on refundable credits that could have improved their well-being.   To some degree, this is the flip side of another set of numbers that get far more attention—those American who pay no federal income tax.  The other day, the Tax Policy Center estimated that about 43 percent of Americans will be off the federal income tax rolls in 2013, down from 47 percent in 2009. Nearly three in four non-payers file 1040s. Nearly all pay some tax—sales taxes, payroll taxes, excise taxes and the like. And most have income taxes withheld from their paychecks but get these payments returned from the government in the form of refunds or credits. There are also people who make money, have no tax withheld, and owe no tax. Think low-income retirees who are living on Social Security or younger adults who work but make very little.      But a surprisingly large number of people do work, do have taxes withheld, but never file 1040s. Because we don’t know much about them, TPC treats them as non-payers of income tax even though some do pay through withholding. As a result, our estimate that 43 percent of Americans don’t pay federal income tax is probably high. A 2005 paper for the National Tax Association Proceedings by Jacob Mortenson of the University of Nebraska-Lincoln, James Cilke of the congressional Joint Committee on Taxation, Michael Udell of Ernst & Young, and Jonathon Zytnick of Yale explores the phenomenon. Unfortunately, their paper uses what are now fairly old data (from 2003) but there is no reason to believe matters have changed very much in the past decade.   It isn’t easy to learn about these non-filing taxpayers, mostly because the IRS only publishes data about those who do file tax returns. But the authors used information returns such as W-2s and 1099s to build a broad profile. Not surprisingly, non-filers who had tax withheld earned a limited amount of income. The NTA paper figures an average of only about $20,500 in 2003. And the vast majority of their income was from wages. Keep in mind, though, that this estimate is based on what was reported on those information returns. Some non-filers surely had unreported income as well. A more recent paper for the IRS publication Statistics of Income also found a signficant number of non-filers who had tax withheld. That paper, by Udell and Joshua Lawrence of Ernst & Young and Tiffany Young at Yale, used 2005 information return data. It estimated that non-filers missed out on $3.8 billion in potential refunds of withheld income tax and another $5 billion in refundable credits. Of course, while many non-filers are owed money by the federal government there are also many who owe taxes, including some who had tax withheld. It is easy to understand the motivations of those who owe Uncle Sam and don’t file (such a course of action isn’t very smart but it is explainable). It is much harder to figure out why someone who has tax withheld and is likely eligible for refunds or refundable tax credits doesn’t bother. We can all speculate about what is happening here, but it would sure be nice to learn more about these taxpaying non-filers.