Have you ever wondered just where the IRS gets the information to conduct audits or go after taxpayers that may not have reported all their income?  Beyond that, what is reportable?  In my experience, I have had numerous taxpayers ask me these two questions, so let’s explore them.

Where does the IRS get all the information on our income?

The most common source is employers.  Whenever an employee received their W2, a copy is sent to the state and federal government.  Another source is the various 1099’s that many of us receive, whether for contract work, retirement income or the sale of stocks and bonds.  A copy of those forms is also sent to the governments.

However, these are not the only sources of information that the IRS has available to check what we report.  Banks also report transactions.  Anyone depositing over $10,000 must fill out paperwork that is sent to the IRS.  The government has the power, with no notification to the taxpayer, to review bank records.  The IRS can also ask neighbors, look at credit purchases.  The simple fact is that, in this day and age of being so interconnected doing business over the internet, it is exceedingly difficult to hide money from the IRS. 

The penalties for such activity can be quite severe to include jail time.  The best approach is to file tax returns on time, pay the taxes required and always work with a professional tax accountant to minimize the liability.

The second question that confuses people is what is taxable?

The short answer is any income that hasn’t been excluded.  Here is a list of taxable income examples:

  • Job income
  • Profit from a business
  • Retirement income (depending on the type of income account)
  • Social Security Income (depending on other income)
  • Unemployment compensation
  • Gain on the sale of property including:
    • Stock
    • Bonds
    • Gold & Silver
    • Property
    • Real Estate
    • Crypto or Virtual Currency
    • Other property
  • Estates over the exemption level that changes annually
  • Winnings from gambling, including lottery tickets.
  • Collectibles

This is not a complete list.  These are the most common sources of income.

There are legitimate deductions and expenses that may reduce the amount that is taxable, but it is all reportable.   When a return is processed by the IRS, the service will compare their information with what is reported.  If the taxpayer reports more income than are reported by other sources, the IRS accepts the taxpayer’s report.  If the amount of income reported from other sources are higher than that reported by the taxpayer, the service will add penalties and potentially audit the taxpayer back as far as five years.

The Internal Revenue Service has a great deal of power to find money and collect taxes.  Their tactics are not what they once were, but they are not to be taken likely.  Even tax preparers are required to assist in ensuring the legitimacy of returns by performing due diligence testing on most credits and the Head of Household filing status.  Failure to do so can result in $520 fine for each failure on each return. If all credits were claimed fraudulently, the tax preparer could be facing $2,600 in direct fines.

Taxpayers should remember that they sign the return under penalty of perjury.  Each taxpayer, whether an individual or a business should work with a trusted professional to capture every legitimate deduction and credit and to focus on a timely return that allows the taxpayer to move forward with the rest of their year.