It’s true that the U.S. income tax system relies to a considerable agree on voluntary compliance. But that does not mean the IRS is solely dependent on a taxpayer’s own disclosures. To the contrary: the IRS often has other sources of information about your possible income sources.
That is why, if you forget to include some of your income on your tax return, it could trigger an IRS tax audit. In California and across the country, taxpayers should be aware of this basic fact.
Some taxpayers may believe that all they have to do is include income as shown on the W-2 form received from an employer. But if you made $600 or more in miscellaneous income, the company that paid you the money is supposed to send you a 1099 form showing that amount.
Sometimes taxpayers don’t receive those statements in a timely manner. The company in question may not have processed them properly or sent them to the wrong address. But that doesn’t mean the IRS is oblivious to the income. The company may have already provided information to the IRS in its own tax filings that enable the agency to know about your miscellaneous income.
In fact, the same reasoning applies even if the income was cash-based side money, such as from mowing someone’s lawn. To be sure, in the case of small transactions, the IRS is not omniscient. For all its resources, the IRS may not know about a particular side job for which you were paid in cash.
But it still makes sense to report it. This isn’t only because you want to avoid a potential audit. It’s also to prevent the IRS from trying to charge you with willful tax evasion if the agency ever does find out that you underreported your income.
Source: “12 tax audit red flags – You forgot some income,” CNN Money, 3-21-13