How
Does the IRS Find 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, just
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!
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