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How Does the IRS Find Taxpayers' Unreported Income?
Ever wonder how the IRS goes about finding income taxpayers fail to report on their tax returns? According to the National Association of Enrolled Agents, the tax collector can track down what a taxpayer may try to hide by using a combination of high tech and low tech methods.
Bank Statements: One way the IRS finds unreported income is to examine bank statements at an audit. Many taxpayers believe IRS will not look at their bank records, but in fact, in unreported income cases, most of the taxes recovered by the IRS during an audit are discovered by an analysis of taxpayers' bank statements.
Third Party Contacts: Another method of identifying unreported income is through third-party contacts. The auditor will contact various parties with whom the taxpayer does business. If the taxpayer is a contractor working for different companies, the IRS will contact those companies and ask to examine the checks the taxpayer should have received. The back of the checks will tell if they were deposited in the taxpayer's account, cashed at a check cashing facility or perhaps a liquor store. If the checks were not deposited into the taxpayer's bank account, the auditor will determine whether the checks were reported on the tax return.
Life Style Audits: Still another method which the IRS has tried is the so-called "life style" audit. The IRS tries to match the income the taxpayer reports with his or her lifestyle. A taxpayer who wears a fur coat, diamond rings and has a chauffeur but only reports $35,000 per year as income, may need to explain to the IRS why there is such a disparity between the income reported and the personal lifestyle. Is the taxpayer able to show he or she received loans, gifts or had some other source of nontaxable income?
Market Segment Specialization Program: In the Market Segment Specialization Program (MSSP), the IRS has done in depth studies of various occupations and their practices. Groups already finished include attorneys, musicians, bed and breakfast inns, and taxi drivers to name a few. The resulting MSSP guidebooks help auditors understand where to look for unreported income in each occupation studied. Currently, there are 42 guides online at the IRS web site, with new ones being added each year.
Informants: Finally, informants often give IRS information on friends, business partners, relatives and especially ex-spouses or boyfriends/girlfriends. IRS will sometimes give a reward for this information.
In the long run, peace of mind is worth more than the taxes due. If you haven't filed in a while or if you know someone who hasn't filed in a while, now is the time to come back into the system. It is far better for you to come forward than for the government to come for you!
Tax laws are subject to change at any time.
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