How Does The IRS Find Unreported Income?

Unreported income is costing the U.S hundreds of billions yearly in taxes. That is why you should not be surprised that the IRS has a process in place to determine unreported income.

Agents of the IRS conduct field audits in case it suspects a taxpayer is not fully transparent with their taxable income. The IRS can determine whether all your income has been reported to the IRS based on several methods.

Firstly, the IRS is looking at the sources of money that are coming in and the expenditures that are made. IRS’s main objective is to find out whether a taxpayer can afford their living expenses. So, in case your expenses are higher than your income, you will need to be able to justify the difference. In case the difference is lower than $10,000 you do not have to be afraid of the IRS digging deeper into your finances. In case the difference between sources of income and expenditures is higher than $10,000 the IRS will dive deeper into your finances.

Bank Deposits

The IRS can also look at the sources of the deposits made onto your bank account to determine whether this income was fully reported. Some sources of deposits can be nontaxable, but the IRS can filter those out to come to a legit conclusion.

During the year, your employer is sending you several income-reporting statements such as K-1 and W-2 forms. The IRS will always receive copies of these forms. The IRS will match these statements with the income reporting on your tax return.

The IRS also investigates major differences between reported profits and losses for businesses. Whenever a business, large or small, cannot justify their expenses with legitimate sources of income, it will initiate further investigations by the IRS. So, make sure you will always fully report your finances because the IRS has their processes in place to come after you if you decide to not be transparent. Contact us for help with your taxes in Minneapolis.

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