Can the IRS find out about extra income if you put it in the bank?

Question

A person I know does side work and earns about $15,000 a year in extra income. He refuses to put it in the bank because he is worried somehow the IRS will find out about it and he will be in trouble.

He keeps the money in a safe in his house.

Can't he just put it in the bank? Will the IRS really go after him for an extra $1000 deposit every month?

Answer 1

hello -  not to be a wet blanket, but he is breaking the law.  and for 15K?  is it really worth it?  if hes in a low tax bracket he wont pay much of it in taxes.  if hes in a high tax bracket why would he risk loosing it all for 15K under the table cash?  nevermind the fact that he actually is telling someone about it - the best secrets are those you dont tell anyone at all.  now his secret is out, and its only a matter of time for that to get to the "wrong" ears.  id be careful if i were him.

Answer 2

Yes, the IRS can find out about the income, but it may not do so.  

You should understand that the IRS employs very small number of employees in comparison to the number of taxpayers that they are responsible for monitoring.  Much of what the IRS does is automated.  If one of the automated processes does not detect the income, then an IRS employee would have to take some action to notice the deposits.  

The IRS generally discovers unreported income when the other party reports the income to the IRS.  For example, the clients may submit Forms 1099 to the IRS.  If the income is not reported on a tax return, the IRS may initiate an audit.  This is usually handled by the IRS computers.  

On audit, the IRS will review the person's bank statements.  If deposits are made, the IRS auditor will count them as taxable income unless the person can show that the deposits were not taxable income (such as gifts, transfers between accounts, etc.).  

If the person owes the IRS for other unpaid taxes, the person may be contacted by an IRS revenue officer.  Like the IRS revenue agent (i.e., the auditor), the IRS revenue officer (i.e., the collector) may also review the taxpayer's bank records and note the income.  

In almost all cases it is best to report the extra income on a tax return.  With proper tax planning, this may not result in any additional taxes.  For example, given the amount, the person may be able to contribute the full amount to a Solo 401(K) and not have any taxable income.  That is just one strategy.  You should refer this person to a tax attorney or CPA.

Best regards,

Kreig Mitchell

www.irstaxtrouble.com

Answer 3

There are various ways for the IRS to find out about unreportede income - and that's even if you bury it in your back yard.  And yes, if they find out, they'd come after him for that, plus interest and penalties.

Answer 4

We usually get a statement every year for interest received on our checking account that is to be included when filing your taxes.  If he did that and the audited him, they may figure it out.  It's technically illegal to work without paying taxes, so of course he should be worried.

Answer 5

Its certainly possible, yes.  Its may not cause an audit on its own, because he would be putting it in regular increments under $10,000 apiece.  But, it possibly could.  If he is high income or has some other audit flags though, he'd have a really hard time explaining how that money appears so regularly in his account.  He's certainly better off either being legal about it, or using it to pay daily, out of pocket bills with.

Answer 6

the IRS would not see it from when it goes into the bank, they will figure it out when he is spending more money then is feasible for someone in his financial position.

for example, (forgive the dramatics) Al Capone was making money off the books but never reported it. he was living beyond the means of what he was reporting on his tax returns. that is the sort of behavior that would cause the IRS to look at someone.