How does the IRS investigate tax evasion if someone has been paid cash their not reporting?

Question

If you turn someone in to the IRS for tax evasion when they've been paid with cash, does the IRS investigate bank records, etc to see if income amounts exceed the amount reported on income taxes?

Answer 1

There are several mehtods.  Looking at bank deposits but often this won't show everything since someone can pay all their expenses with cash and deposit very little of their cash income.

Looking at the person's expenses which may far exceed reported income.  

One guy I know has a beer joint and they checked his suppliers to see how much he bought, then calculated a mark-up, allowed some breakage, etc. and then calculated a theoretical sales figure.

Answer 2

Do a web search for "suspicious activity report" (SAR).  If deposits/checks/transfers or spending appears to exceed your reported income, the IRS (or gov't) may investigate further to check for tax evasion or other illegal activities.

Answer 3

Unless you are talking about a lot of money it is not worth their time to send an investigator to dig this up.  However if you are talking a lot of money say $10,000 or more then certainly they will.  They will check bank records to make sure all deposits are in line with the income you are claiming.  They will also evaluate your life style.  If you claim to make say $30,000 a year and you live in a $200,000 home and drive a fancy car with a motor home or boat in the drive then they will certainly know that something is wrong.

Answer 4

Most of the time they are alerted by lifestyle issues.  If you have a mortgage or property tax on a $500,000 house and did not file a tax return you are going to get a visit.  In California the TB just uses a formula to guess at you income and force you into proving otherwise.