![]() ![]() Little does John know, the IRS received a Form 1099-MISC reporting $1,100 that ABC Builders paid to John Doe. When the auditor asks John what he does on his off days, John says he enjoys fishing. When the auditor asks for copies of all of John’s bank records for all accounts for 2013, John gives the auditor only his primary checking account and says there’s no other account. John repeats that he earns money only from his firefighting job and hasn’t received any other income or funds during the past five years. The auditor also asks John whether he received any other funds (like gifts, loans, inheritances, etc.) for 2013. John tells the auditor that his only income was from his firefighter job. During the audit, the IRS auditor asks for any other income that John had, including business income. In 2014, John gets an audit letter for his 2013 return. John gets a refund of about $1,000 each year.įraud indicator: Omission of an entire source of income 2: The Audit Letter Arrives When John visits his accountant each year to file his taxes, he doesn’t mention the side business, and his accountant doesn’t ask. From 2011 to 2013, John cleared about $35,000 a year, after expenses, from his side business. John deals in cash for most of his plumbing jobs, but sometimes he deposits plumbing income into a special savings account. On his off days, John does plumbing work for local builders and other clients he acquired through word of mouth. This leaves John with a good primary source of income, health and retirement benefits, and, mostly, a lot of extra time to earn more money. During his off hours, he has developed a lucrative plumbing side business. John Doe is a firefighter and works one 24-hour shift every fourth day. We’ve called out the fraud indicators the IRS looks for as proof of tax evasion. Here’s how a common tax evasion case unfolds. The IRS calls these behaviors “badges of fraud.” They’re hot buttons that indicate tax evasion. This issue has gotten many gig economy workers in trouble with the IRS, when they leave out income from their side hustle.ĭodgy behavior during an audit: People who make false statements or purposely hide records (such as bank accounts) from an IRS auditor are headed for criminal prosecution. This includes leaving out specific transactions, like the sale of a business, or entire sources of income, such as income from a side business. Unreported income: This is the biggest issue that brings taxpayers under criminal investigation. Here’s more about what the IRS looks for: The error amounts are usually large and occur for several years – showing a pattern of willful evasion. In the audit, the IRS finds errors that the taxpayer knowingly and willingly committed. Usually, tax evasion cases on legal-source income start with an audit of the filed tax return. What Gets Taxpayers into Criminal Prosecution with the IRS But, if you conceal assets and income that you should use to pay your back taxes, that’s a different story. The IRS doesn’t pursue many tax evasion cases for people who can’t pay their taxes. Misreport income, credits, and/or deductions on tax returns.Tax evasion cases mostly start with taxpayers who: ![]() The IRS mainly targets people who understate what they owe. In 2015, the IRS indicted only 1,330 taxpayers out of 150 million for legal-source tax evasion (as opposed to illegal activity or narcotics). In fact, fear of an IRS audit is one of the main reasons that people strive to file timely and accurate tax returns each year.īut here’s the reality: Very few taxpayers go to jail for tax evasion. Many people are afraid of IRS audits - and maybe even going to jail if they make a major mistake. ![]()
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