Trying to hide your income from Uncle Sam is a bad idea. Even if you are smart enough to hide it, the credit info alongside third party banking can get the IRS's radar on you
At some point in time, if you refuse to file and pay your taxes, the IRS will detect. There are many unreported income cases, but how does the IRS find out, and what can you do about it?
The IRS has a system called the Information Returns Processing System (IRP). This system is a vast database that processes the information of all taxpayers. It examines and reviews all reported and unreported earnings. Not only that, it compares stated income with the data from a third-party system. Many organizations you are connected to like your bank, employer, and other financial institution reports to the IRS every year, the same way all taxpayers do. Should there be any discrepancy, it triggers a red flag, and the IRS will investigate it.
How Does Uncle Sam Get Information About Your Income?
Your employer and other third parties' financial institutions like credit card companies all supply data to the Information Returns Processing System (IRP). According to federal law, all companies must report their staff's income like wages, interest, dividends, or pension. The IRP supplies all information about your income to the IRS.
In a case when a taxpayer does not report their entire income, this means that what is on their tax return is less than what they got as income. This will trigger an alarm, making Uncle Sam compare the income on your tax return with what the IRP supplies. The IRP makes it possible for agents to compare salaries that third parties provided against what you reported as income.
If they confirmed that indeed, you did not report your entire income, the IRS would start the collection process. The first process is to send you a letter to inform you of the discrepancy they found in your return. They will also tell you there is unpaid tax. You have two options:
You try to pay what you owe.
You dispute the discrepancy.
Many times, it is when the IRS smells a rat that they consult the RRP for information. This could be nonpayment of tax or underreporting of income. There could also be cases when they request info to adjust your calculation or file a substitute tax return.
How the IRS calculates a taxpayer’s liability?
Many at times, the IRS sends an estimate of the tax they believe you owed. They use information from previous tax returns alongside data from the IRS to estimate the tax you owe.
The IRS calculates and estimates what they believe you owe as a tax because the tax return they will forward to you must carry the amount due. By law, they must supply you with some information. In assessing the amount, you owe, the IRS either files a return or adjusts your return. This is called a Substitute for Tax Return.
What to do on getting a notice from the IRS
After getting a notice from the IRS, the first point of call is to determine precisely what you owe. Many times, the IRS does not include any credit or deductions. This makes their estimation pretty high. You can get in touch with them and rectify this if you believe the information on your SFR is inaccurate.
You, however, need your financial document to back up any claim you make. Also, make sure to contact the IRS on time. To the IRS, any delay means that their assumption is correct and final. This could trigger aggressive collection strategies like wage garnishment.
On a final note, do not consult the IRS on your own. You are better off with a tax expert. The IRS only wants what it wants from you – more money. As a result, consult with someone that will have your interest at heart and get justice for you with the IRS.
