In 2019, only 0.45% of taxpayers faced a full-blown audit by the Internal Revenue Service (IRS). But just because the IRS is auditing fewer tax returns doesn't mean that more people are getting away with failing to report income. The agency relies on automated systems and tools to spot discrepancies and potential problems long before a real IRS agent has to get involved. To that end, here are some of the most common ways that the IRS finds out about unreported and under-reported income.
Even if you don't file a return, the IRS can still find out about your earnings from the information reported by 3rd parties. Federal law requires employers, banks, and other parties to report the wages paid their employees or payees. The agency collects this data in the Information Returns Processing System (IRP) and matches it with the information you report on your return. If the income doesn't match, the IRP sends out an alert and flags your file for investigation. IRS computers can also detect false claims for the earned income tax credit. It also is believed that the agency can track medical records, credit card transactions, and other electronic transfers.
The IRS can pay a reward of up to 30% of the government's tax recovery to anyone who provides valuable information leading to the collection of taxes, penalties, and interest from a non-compliant taxpayer. The IRS generally reserves these rewards for evaders with high-income levels, and the amount of the whistleblower's award depends on the tax amount in dispute.
High Wage Earners
The most significant factor that makes people at risk for an IRS audit (and ultimately the agency finding out about unreported income) is their income. For taxpayers who earn between $1 million and $5 million, the audit rate is 2.21%. However, for taxpayers who earn more than $10 million, the rate is 6.66%. High wage earners are more likely to have complex returns that are ripe for mistakes, miscalculations, and under-reporting. So these earners must keep accurate tax records throughout the year and be mindful of deduction limits.
Do you need help with your tax matter? Call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.