Do You Make These Mistakes: You Underreport Your Income
So many of my clients find themselves in trouble with the IRS because of unreported income. Generally, these are the self-employed clients or those who are employees, but do some "work on the side." What I have found is that most of the time, these taxpayers do not intentionally under-report their income. They simply believe they have some business expenses that they cannot back-up, or they forgot to record some money they earned in their books.
Large corporations usually don’t run into the "forgot" reasoning because they have more advanced accounting and bookkeeping methods, but small business owners who work out of a pick-up truck don’t always have the best accounting methods.
Anyway, the IRS usually catches up with these folks because there are some inconsistencies on their income tax returns, or some extremely large deductions that just don’t fit. And like I said before, they generally can’t back up these expenses when the IRS comes to town for their audit and the IRS lays some more tax on them thick.
When you underreport your income, it may be negligent or it may be intentional. If you fall into the intentional bucket, you may have more issues than you think and you will be looking at potential criminal charges and…gasp, jail time. When you’re negligent, the IRS will just want you to "get right." Most of the posts on this blog talk about the different options you have to "get right" and help to get you through some of the speed bumps you may run into.
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[...] omitting your earned income credit, putting the incorrect social security number on the tax return, not reporting all of your income (see my recent post), and bad math [...]