This may come as a surprise. By the time you file your tax return, the IRS already knows a lot of the information that you are asked (forced?) to submit. How? Simple! Businesses report all the taxable transactions not only to you, but to the IRS as well. If a business or an organization sent you some kind of tax form, they also sent a copy to the IRS.
Examples of what they report to the government:
- Your regular employers: salaries, wages, bonuses, and commissions (reported to you on form W-2)
- Your contract employers: compensation for your services (reported to you on form 1099-MISC)
- Your bank: interest (reported to you on form 1099-INT)
- Your mutual funds: dividends (reported to you on form 1099-DIV)
- Your broker: capital gains on securities sold (reported to you on form 1099-B)
- Your real estate closing agent: proceeds from the sale of your home (reported to you on form 1099-S)*
- Social Security Administration: your social security benefits (reported to you on form SSA-1099)
- Your mortgage company: your principal and interest payments; taxes paid from escrow (reported to you on form 1098)
- Your retirement plan: money from pensions, annuities, IRAs, and alike (reported to you on form 1099-R)
- Your state: government payments, including unemployment benefits (reported to you on form 1099-G )
[* qualified sales of personal residence may not be reported, if you arrange so at closing]
Is everything reported to the IRS?
Of course not. For instance, if a client paid you less than $600 for contract work, he does not have to report this payment – neither to the IRS nor to you. Some of them will send these “small” forms anyway, but most won’t bother. Unfortunately, you still must report this money and pay taxes on it. By law, that is.
What does it all mean to you?
- You cannot “forget” about your income. The IRS will remind you.
- Even if you did not receive one of the forms mentioned – it is still your legal responsibility to voluntarily report the income.
- Even if the IRS is not directly notified immediately, your “forgotten” unreported income may surface later, causing you lots of problem such as penalties and interest. Example: your babysitting cash money may be “discovered” when the IRS audits the family you worked for.
- Beware: the IRS uses informants and pays them for the tips.
- Honest mistakes do happen, and the IRS acknowledges this.
In short: the IRS has enough information about you to make the grade school “I forgot” excuse ineffective, at best. And too much creativity can be rewarded by an IRS audit.