Call for a Consultation (602) 200-7399

Blog

Hiding In Plain Sight: How The IRS Finds Out About Misreported Income

Posted by Brandon Keim | Apr 22, 2021 | 0 Comments

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.

Computer Automation

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.

Whistleblowers

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.

About the Author

Brandon Keim

A Certified Tax Law Specialist, CPA, partner at Frazer Ryan Goldberg & Arnold LLP, and former Senior IRS Trial Attorney, Brandon Keim holds an LL.M. in Taxation from Georgetown University Law Center.

Comments

There are no comments for this post. Be the first and Add your Comment below.

Leave a Comment

Sample

logo2.png

Aenean lacinia bibendum nulla sed consectetur. Donec sed odio dui. Maecenas sed diam eget risus varius blandit sit amet non magna. Nulla vitae elit libero, a pharetra augue. Curabitur blandit tempus porttitor. Morbi leo risus, porta ac consectetur ac, vestibulum at eros. Cras justo odio, dapibus ac facilisis in, egestas.

The act of visiting or communicating with Brandon A. Keim via this website or by email does not constitute an attorney-client relationship. Communications from non-clients via this website are not subject to client confidentiality or attorney-client privilege. Further, the articles, discussion, commentary, forms and sample documentation contained in this website are offered as general guidance only and are not to be relied upon as specific legal advice. For legal advice on a specific matter, please consult with an attorney who is knowledgeable and experienced in that area. Attorneys listed in this website practice only in the jurisdictions in which they are admitted. This website is governed by the Arizona Rules of Professional Conduct.

Menu