Posted by Income Taxes and Bookkeeping LLC

Unreported Income: This is How Uncle Sam knows

Unreported Income: This is How Uncle Sam knows

Yeah, we understand that you do not want to let go of your hard-earned money to the IRS. However, trying to hide it from Uncle Sam is a recipe for trouble. No matter how smart you think you are, the credit info with the third-party banking could get you in trouble with big old Sam.

Uncle Sam will detect at some point if you are not filing and paying your taxes. Here is how the IRS finds out about unreported income. 

There is a system with the IRS known as Information Returns Processing System (IRPS). This is a massive database with data and information of all taxpayers. The system reviews and analyzes all cases of reported and unreported income. The system also compares data and reported income from other third-party systems.

Many other organizations you work with, like banks, credit society, your place of work, and various financial institutions, all report to Uncle Sam yearly. If there is any discrepancy, a red flag will be on the IRS's radar. 


Information about Your Income: How Does Uncle Sam get it?

There are series of information and data coming to the Information Returns Processing System (IRP) from various places like credit card companies, your boss, etc. It is a directive of the law that all firms must report their employee's income like wages, dividends, pension, interest, etc. This information on your payment is sent to Uncle Sam by the IRP.

 If a taxpayer fails to report all their income, they will have a lesser value on their tax return compared to what they indeed got as income. This discrepancy will trigger an alarm that will mandate the IRS to compare the income on your return with what it has on file with the IRP. 

Should Uncle Sam indeed confirm that you did not report the entire income, they will go ahead with the collection process. Uncle Sam will first inform you of the tax discrepancy and let you know that you owe taxes. There are two options."

  • You pay what you owe.

  • You can dispute the claim.

Uncle Sam does not consult the IRP (International Registration Plan) every time, but when they smell a rat-like underreporting of income. At times, they might also need more information to adjust your calculation to file a substitute tax return. 


How Uncle Sam estimates a taxpayer’s Liability 

There are times Uncle Sam will forward an approximate tax they believe you owe. Information from previous tax returns with data from the IRP is what they use to arrive at this. 

Since the tax return Uncle Sam will send to you needs to have a due amount, they will estimate what they believe you owe. This is compulsory by law to send you a substitute for a tax return (SFR). 


How to Handle a Notice from Uncle Sam

When the IRS sends you a notice or a substitute tax return, your first approach is to determine what you owe in tax exactly. Note that the IRS will hardly include any deduction or tax credit, which makes their estimation pretty huge.

 If you think your SFR (Substitute for Return) has an inaccurate estimation, make sure to get in touch with them and rectify it. If you are making any claim, be sure you have the financial document as backing. Uncle Sam will assume that delay is an indication that their estimation is right. You could have aggressive strategies from the IRS like tax lien to collect the refund. 

Finally, make sure you never consult Uncle Sam on your own. Work with a licensed tax professional such as INCOME TAXES & BOOKKEEPING, LLC. so they can help you deal with the IRS professionally and get justice for you. 


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