How does the IRS catch tax fraud?

How does the IRS catch tax fraud?

According to the Internal Revenue Service (IRS), there’s about $450 billion missing from its coffers. The money wasn’t stolen so much as it was never delivered in the first place. That’s the estimated “tax gap” the IRS believes exists between what taxpayers should be paying and what they’re actually sending in.

Your private financial information isn’t so private

Naturally, the IRS is pretty keen on catching anybody it thinks may be a tax cheat so they can collect that money. Here are some of the ways that they do it:

  • The Information Returns Processing System helps the agency match up what’s submitted on W-2s, 1099s and Schedule K-1s from employers, investments companies and other businesses with what’s reported by taxpayers.
  • They use secretive systems that are believed to track everything from credit card transactions, banking deposits and more. The agency won’t reveal much about its methods, but the evidence is high that they have some sophisticated electronic tracking methods in place.
  • They look at your social media. Americans increasingly lead public lives. Your social media posts can betray additional sources of income through your comments and photos of your lifestyle.
  • They use informants. Anyone from your disagreeable brother-in-law to a disgruntled former employee can blow the whistle on you for revenge if they suspect tax fraud. Others may turn in a suspected tax cheat either because they want to do the right thing or they want a reward — and the IRS does reward some people for their information.

Will you go to jail if the IRS finds you omitted something from your taxes?

Not necessarily. Many omissions are just mistakes. Maybe you overlooked a small 1099 from a minor client or you completely forgot about an old investment and the information about the dividends has been going to a prior address.

Just the same, any investigation by the IRS can be problematic — and costly. To minimize the potential issues you face, get legal assistance as soon as you know there’s an audit.

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