Your tax return might be your most important document, but you’re not the only one writing it. The IRS also prepares its version of your return and compares it to yours. If there are discrepancies, you may get an audit notice in the mail—or worse, face criminal charges for tax fraud. Here’s how the IRS discovers unreported income:
The IRS gets information returns from third parties.
The IRS receives information returns from third-party payers, including banks, employers, brokers, and payers of interest, dividends, and other income. The IRS uses this information to match it against your tax return.
The IRS uses data mining.
The IRS uses data mining to find unreported income. Data mining software can search through millions of records to look for patterns that might indicate tax fraud. For example, if you have a large cash deposit into your bank account but no corresponding record of an income source, the IRS can use data mining to identify it as an area where further investigation is warranted.
Data mining also allows the IRS to uncover unreported income in real estate and credit card transactions. Data miners will analyze financial records and look for inconsistencies between what’s reported on a person’s Form 1040 and other sources of information about their finances, including social media posts or public documents like property deeds or birth certificates.
The IRS does more audits.
The IRS is doing more audits. This increase is because the IRS has more resources to do more audits.
If you think your taxes are simple, think again! Audits aren’t random, nor are they equal opportunity or fair. Some people are targeted more than others, and their circumstances can seem unfair to them at times—but that doesn’t mean there’s anything wrong with how the IRS conducts its audit process.
Audits can be stressful because they require time and money from you, in addition to the stress associated with dealing with a government agency about your financial situation (not exactly fun). But although an audit can be expensive due to legal fees and other related costs, it won’t always cost you any money if your case is resolved favorably before a trial begins.
Your employer is required to report your income.
Your employer must report your income no matter how you are paid. This includes cash and goods, as well as services. Your employer does not have discretion in this matter; it is an IRS rule that all employers must follow.
If you are paid in cash, the amount of money you earn must be reported on a Form W-2 (Wage and Tax Statement). This form will also show any taxes withheld from your paychecks throughout the year.
If your employer pays you in non-cash forms, such as gift cards or stock options, these payments must still be reported on Form W-2 as part of your gross income for tax purposes. It is because it’s assumed that employees would prefer cash over non-cash benefits from their employers if given a choice between the two options, so any value associated with these sorts of perks should be included when calculating both taxable incomes.
If you are self-employed and work for yourself on a contract basis (such as being a consultant), then your client is required to issue instead of paying you by check or direct deposit.
Now What Happens to Me If I Don’t File My Taxes
You’re committing tax fraud if you’re not reporting all your income because you don’t want to pay tax on it.
Tax fraud is one of the most frequent white-collar crimes. It’s also the most serious because it can lead to jail time and hefty fines. The IRS takes tax fraud very seriously: they devote a lot of resources to finding people who are not reporting all their income so that they can prosecute them for this crime. If you’re not reporting all your income because you don’t want to pay tax on it, you’re committing tax fraud and could face severe consequences.
You can contact the IRS if you have unreported income and want to file a return.
If you have unreported income and want to file a return, you can contact the IRS and make arrangements to pay your taxes. You can also file your return online.
If you default on your tax debt, however, filing for an installment agreement will not work in most cases. The IRS will ask for proof of income before processing any request for an installment agreement. Asking someone else, such as a friend or family member who earns money regularly, is one way this proof can be acquired, but otherwise, it may require some legwork on your part (in other words: start a side hustle!).
The IRS has several options available if they find out about undeclared income: levy or garnish wages; seize assets; assess penalties; enforce criminal prosecution if applicable (for example, fraud charges); lien property held by third parties such as banks or landlords; suspend driver licenses until debts are paid off entirely through garnishment/levy methods mentioned above…etcetera.
You can end up in jail for failing to report all your income.
It’s not just the IRS that will come after you if you fail to report all your income. You could also face criminal charges for tax evasion or fraud. And, as you probably know, those are big deals—the penalties are steep, and the consequences can be devastating. Suppose you are convicted of tax evasion or fraud, a judge will likely sentence you to prison time and order restitution for any unpaid taxes.
Penalty of Missed Payment Due to Unreported Income Tax
Penalties will also apply if you fail to notify the IRS of your income; in essence, you have missed a payment and will be assessed a late-payment fee. A failure-to-file penalty of up to 25% is assessed by the IRS for each partial month that a return is late.
If you deliberately fail to report income on your tax return, the IRS will probably find out and prosecute you.
The IRS may discover this through an audit if a taxpayer fails to report income on their tax return. If the IRS sees that you have money in your bank account that you didn’t report on your tax return, they’ll likely want to know where it initially came. For them to learn about this hidden income, someone has to tell them about it—and this person is usually you!
To prove that you were deliberately trying not to pay taxes, the government can pursue criminal charges against anyone who willfully fails to report their actual income on their tax returns. If convicted of tax evasion by deliberately underreporting one’s income (or related forms), a taxpayer will face serious consequences, including fines and imprisonment, depending on how much money was involved in evading taxes.
The IRS is constantly on the lookout for people who are cheating on their taxes. They have a lot of resources to do this, and they’re getting better at it all the time. If you fail to report income you should have registered; you’re committing tax fraud. You can go to jail for this crime, but it’s not just about punishment. Tax fraud hurts everybody who pays their fair share, too—not just those who don’t pay anything!
