For many self-employed people in California who have multiple clients and are sometimes paid in cash, keeping records for taxes is a hassle. However, according to Chron.com, failing to provide all the information to the IRS at tax time can result in disaster.
Even when a client or customer pays in cash, he or she should be reporting the expenses to the IRS on tax forms. These documents are matched to the income tax claimed by the person who should have received the payments. If it is not there, the IRS notifies the person of the discrepancy and gives him or her a chance to fix it. At this point, the assumption may be that the unreported income was simply a mistake. There will be financial penalties in addition to the original amount that should have been paid.
According to H&R Block, intentionally hiding money from the IRS could result in a criminal conviction. A very small percentage of taxpayers are actually indicted, though. In fact, approximately 150 million people pay taxes each year, and of these, 1,330 went to prison in 2015 for tax evasion.
An auditor may get the IRS Criminal Investigation Division involved if the following red flags appear during the audit:
- Omission of income sources
- Bank account concealment
- False statements
- Delay tactics
A person could receive a prison sentence of up to five years if convicted. Not only that, he or she may pay as much as 75 percent of the amount owed as a penalty in addition to the taxes on all of the unreported income that the auditor and investigation uncover.