Source: http://www.bloomberg.com/news/articles/2...

Every time a person gets a W-2, a 1099 or other tax form, the IRS gets a copy, and its computers analyze them to see who has failed to file. If you’re owed a refund (or refunds), the IRS doesn’t particularly care if you don’t file. After three years, though, you no longer have a right to your refund. The system does flag taxpayers when it's clear that they owe money, but even that can take the agency a few years to act on, says Jonathan Bochese of the Tax Defense Network. Tax documents triggered by a home sale, a loan or a stock transaction can pique the IRS's curiosity, too.

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If you owe the government money, you'll have to pay it, plus interest and fines. If you owe money and don't file, the IRS charges a penalty of up to 25 percent of what you owe, and it can charge an additional 25 percent for failing to pay your bill on time. A 75 percent penalty is reserved for egregiously fraudulent returns, IRS guidelines say. There’s also interest to be paid, currently compounding at 3 percent per year.