Law Offices of Robert T. Leonard, APC
Free Consultations Available
Toll Free 888-408-9486
818-224-7935

How the IRS tries to catch taxpayers underreporting income

The IRS is aggressive in pursuing taxpayers it believes has underreported its income. The agency estimates that the federal government loses hundreds of billions per year in unpaid taxes due to underreported income, according to CBS News. This explains why IRS agents conduct field audits, also called face-to-face examinations.

The IRS uses several tools to build evidence that a taxpayer is supposedly hiding something. Among them are:

  • T-account analysis. This method is essentially a comparison of the taxpayer’s sources of money and his or her expenses. If the expenses outstrip the cash, the IRS may ask the taxpayer to explain the difference. This does not mean the taxpayer has committed fraud; he or she could have nontaxable income.
  • Bank deposit analysis. In addition, the IRS will likely ask to look at your bank account’s deposits, to see if there were any deposits that were not reported. Again, some legitimate deposits, like life insurance proceeds and gifts, are nontaxable.
  • Internet activity. A business that conducts online transactions may find its Internet activity probed.
  • Information statements. The IRS will take copies of your income reporting statements, like 1099s and W-2s, and uses computer software to compare them to your tax return.
  • Business financial ratios. The IRS assumes that self-employed people and small business owners are trying to make a profit. Agents conducting a field audit may compare financial ratios like gross income and profit ratios to the numbers reported by a similar business, using online resources for their data.

An audit is not the end of the world, and with the help of an attorney, you will get through it.

No Comments

Leave a comment
Comment Information

Send Us A Quick Message

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Law Offices of Robert T. Leonard, APC

Woodland Hills Office
21700 Oxnard Street
Suite 2060
Woodland Hills, CA 91367

Toll Free: 888-408-9486
Phone: 818-224-7935
Fax: 818-587-3833
Woodland Hills Tax Law Office

Los Angeles Office
10100 Santa Monica Blvd.
Suite 300
Los Angeles, CA 90067

Toll Free: 888-408-9486
Phone: 818-224-7935
Fax: 818-587-3833
Map & Directions

Call Today