Legal Implications of Underreporting Salary for Tax Reasons
Most taxpayers caught underreporting their income due so unintentionally because of a miscalculation on their return. However, underreporting income is illegal, and those who underreport can be subject to penalties, and even criminal proceedings.
Correctly Reporting Income
To avoid IRS penalties due to underreporting, taxpayers should have a basic understanding of exactly which items to include and exclude in their income, plus what tax credits and deductions they qualify for. Apart from wages, salary and commissions; any money received through gambling, tips, side jobs, awards, prizes, and contest winnings are fully taxable. It is crucial that taxpayers collect the receipt of any income received from any source, irrespective of the amount.
IRS Notice for Underreported Income
The IRS compares the information provided by the taxpayer and their employer(s), banks and financial institutions, and other income sources. In cases where the IRS spots underreporting on Forms W-2, 1098, and 1099, it will send a CP-2000 letter - Notice of Underreported Income to the taxpayer concerned.
A CP-2000 informs taxpayers about the proposed adjustments to their income, credits, deductions, and the amount of adjusted taxes that needs to be paid. Taxpayers may expect to also receive a CP-2000 Notice if they over-report their income. In such cases, the IRS will provide information about the additional refund that will be sent.
If a taxpayer disagrees with the proposed changes by the IRS, they can call the IRS with the phone number provided in the notice. It is suggested that taxpayers be prepared to present documentary proof of their claims, if they call the IRS.
While filing taxes may be a headache, incorrectly filed tax returns can be an even bigger headache, as well as attract penalties. Whether taxpayers file their return themselves or hire a tax preparer, calculating the figures correctly is critical.
The IRS actively looks for underreporting, because it is the single largest contributor to the ever-increasing tax gap. From large corporations to the self-employed, the underreporting of income is the favored way to evade taxes.
It is essential that taxpayers prepare their taxes correctly and file them on time to avoid IRS penalty fees or tax debt. Practicing illegal tax filing to save on taxes is the express way to get in trouble with the IRS through a tax debt, penalties, or worse, criminal charges. Play it smart and use legal means to limit your tax liability.