From all-cash Christmas bonuses to cryptocurrency transactions, it can be tempting to omit hard-to-track income from your tax return (or to forget to include it). Plenty of people do: The IRS estimates the “tax gap” totals more than $450 billion a year, or 16 to 20 percent of total tax liability. But forgetting to include income can come back to haunt you.
Think paying taxes is expensive? If the IRS figures out you omitted income, you’ll also have to fork over late penalties and interest, which can add another 20 percent or more to your bill, says Joshua Zimmelman, an accountant at Westwood Tax & Consulting.
While you might not be reporting certain income to the IRS, someone else may. For one, the individual or company that paid you will file forms with the IRS to let them know how much you pocketed. (Even cryptocurrency exchange Coinbase just agreed to hand over user info to the IRS. It successfully sued Coinbase after only 802 people reported gains or losses from Bitcoin in 2015.)
The IRS also has a whistleblower program that gives an informant a cash payout if they help recover unpaid taxes. “All it takes is one angry roommate or ex, and all of a sudden, you’re facing an audit,” says Mario Costanz, CEO of Happy Tax.
If you’re applying for a mortgage or personal loan, lenders will use your income to decide how much you can afford. “You can't tell Uncle Sam that you make no money to avoid paying taxes, then tell the bank you're flush with cash [to qualify for a bigger loan],” says Enrolled Agent Deltrease Hart-Anderson of D. Hart Accounting. “The bank’s going to believe what you told Uncle Sam.”
If the IRS discovers earnings you haven’t reported, things can go south fast. If a taxpayer owes at least $10,000—an extreme, but not necessarily uncommon occurrence—the IRS can issue a “silent” lien without notifying you, says Enrolled Agent Jeffrey Schneider with SFS Tax & Accounting Services. You’ll find out, however, when that lien shows up as a public record on your credit report, dinging your credit score and making it hard to qualify for new loans and pass other credit checks, like for a new job or apartment. Even if you owe less, the IRS can also garnish your wages—a.k.a. take money out of your paychecks—to pay down a tax debt you owe. Ouch.