How the IRS Finds Unreported Income
The IRS has numerous tools at its disposal to uncover hidden income. These include analyzing the individual’s financial accounts, bank accounts, tax returns, and e-commerce platforms. For self-employed individuals, the IRS may compare gross income and profit ratios to root out unreported income. The IRS will look for discrepancies between deposits, withdrawals, and tax payments. The greater the discrepancies that are uncovered, the more scrutiny the IRS will exert.
Civil Penalties
The IRS applies civil penalties when individuals understate their income. These can amount to as much as 5% for each month following the date the tax was due. This is limited to a maximum of 25%. Individuals who owe taxes on unreported income may opt for an installment payment plan. Be aware, though, that interest will accrue until you satisfy the tax debt.
Criminal Penalties
Penalties for fraud and deliberately attempting to hide income are much higher than for simply forgetting to report income. In cases where fraud and tax evasion are the motivating factors, the penalties can be as high as 75% of the amount due. Typically, the IRS does not pursue incarceration in cases where the taxpayer owes small amounts or attempts to pay the taxes owed prior to the launching of a criminal investigation.
Avoiding a Tax Audit
The best way to avoid a tax audit is to meet with a tax lawyer before the IRS sends notice that an individual is under investigation. A tax lawyer in Illinois can help prepare the necessary financial statements and tax forms to report the income to the IRS. Because the income error penalties can be significant, taxpayers shouldn’t go it alone.
