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Unreported income can land you in jail

In general, most people are afraid of the Internal Revenue Service (IRS). They are afraid that an audit means that they will go to jail or perhaps not paying enough taxes could be cause to spend time behind bars. In reality, people who commit tax evasion are at the greatest risk of finding themselves facing prison time.

In most cases, people evade taxes by understating income and overstating expenses or by not filing required tax returns. While the IRS usually doesn't take legal action against people who simply can't pay their taxes, they will pursue cases against people and businesses that commit fraud to evade taxes. For example, if you have a side job that you do not report on your tax return, the IRS could come calling. Here is how a typical tax evasion case unfolds.

The side job

Picking up a side job is not uncommon for many people. For instance, if you work in the accounting department of a big company in Little Rock and take the occasional consulting job on the side, you will have some extra income coming in. Imagine that these side jobs pay cash. After a while, this extra work starts to add up and at the end of the year you realize you have raked in an extra $30,000 which is safely deposited into a special savings account. However, the next time you meet with your tax preparer, you fail to mention that you made this extra money. You file your tax return and receive a $1,500 refund.

The IRS letter appears

A few months after you file your return, an IRS letter appears in your mailbox. You are being audited. When you speak with the auditor, they ask for any additional income that you would like to include on your tax return. Did receive any gifts, loans, inheritances or any other money? You continue to claim that the only money you received was from your regular job.

The auditor might ask for bank statements and question you about how you spend your time off. For example, where did you go on vacation last year? What do you do on the weekends? You hand over the statements for your main checking accounting, state that you have no other accounts and tell the auditor that you spend your off time relaxing at home with a good book. Unfortunately, you have now told the IRS auditor a few things that are not true and failed to fully provide the documents requested.

The IRS already knows

While you are stashing away money from your side job, the individuals or businesses you are providing consulting services to are posting this expense to their books. Furthermore, they are filing Form 1099-MISC with the IRS. This form has your name, social security number and the amount that the company paid you. Maybe you didn't receive your copies of the forms because you moved early in the year or maybe the companies had the wrong address for you in their records.

The problem is that the IRS already knows you are earning other income in addition to the wages from your regular job. Furthermore, the IRS knows about that special savings account where you were depositing the extra money because the bank filed a Form 1099-INT on the interest the account earned during the year. In other words, the IRS already has the proof it needs to charge you with tax evasion.

If you are facing tax evasion charges, with a strong defense you can fight back and possibly avoid a criminal conviction for tax evasion.

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