Some people have the ability to earn most of their income via good old fashioned cash. Getting paid in cash is convenient, since it cuts down on the need to go to a bank. And, cash is the preferred way businesses and people like to get paid. But getting paid in cash gives incentive for people to start underreporting their income.

Underreporting Your Income: The Basics

If your employer isn’t submitting a W-2 form to the IRS detailing your income and withholdings, then Uncle Sam pretty much has no idea how much money you’re making.

That’s where self-reporting comes into play. When it comes to self-reporting, if you want to avoid a tax audit and back tax debt, then honesty is the best policy.

Hidden Income: A Never Ending Pursuit for IRS Agents

The IRS collects more than $2 trillion in tax revenue every year. But some people aren’t completely honest with their cash income come tax time. That led to $385 billion in income not being reported to the IRS in 2006. (That was the most recent year for which the IRS studied the “tax gap.”)

That tax gap gives the IRS incentives to track down and audit those who underreport their income, cash earners among them.

Underreporting Income = Tax Evasion

While a car dealer, valet attendant, or small businessperson may pay no mind to not reporting all of his or her cash earnings, what’s actually being committed is tax evasion. It’s the most common of all charged tax crimes, and is often performed by clothing store owners, self-employed restaurateurs, car dealers, and even professionals like doctors, lawyers, and even accountants (of all people).

But if an IRS agent catches you underreporting income, there can be fines, penalties, and possibly a referral to the IRS’s much-vaunted Criminal Investigation Division.

Some people caught underreporting cash income try to defend their acts by arguing that they merely hoard their cash. They spend it when needed! After all, it’s not illegal to keep all your cash hiding inside your mattress. So, some cash income underreporters try and convince the IRS that that’s all they’re doing.

While the IRS doesn’t care if you keep your income stored as cash at home, it’s reasonably skeptical of people who keep large piles of cash at home rather than in a bank. All the IRS wants to know is if that mass of cash stemmed from taxable income. And if so, whether it was reported and whether you paid all necessary taxes. Again, honesty is the best policy.

Come Clean Today

While earning cash can be convenient and preferred among employers and employees alike, it’s not the easiest thing to do. The IRS is continues to cut down on the billions of unreported income flowing in the economy.

If you’re a business or employee who earns income via cash, back tax debt can be just around the corner. After an IRS agent discovers the unreported income, he’ll assess taxes on that amount. That total can add up with interest and penalties. If you’re at risk of being in that situation, drop us a line so we can help you avoid a wage garnishment or bank levy.