Underreported Income Guide: Here's 4 Simple Steps To Take (2024)

Causes of Under Reporting Income

It may seem like the penalties involved with underreporting income aren’t worth the risk, but it does happen. Here is more detail on the two most common causes of underreporting:

To Pay Less Tax

One of the most common reasons people underreport is simple: They want to lower their tax liability. Paying taxes can be stressful for many taxpayers, and some have to get on a payment plan or other arrangement to afford what they owe. Unfortunately, underreporting income will only lead to more headaches and penalties.

Accidental Underreported Income Mistakes

Sometimes, the cause is a simple reporting mistake. A taxpayer may have accidentally under reported income because they left off a tax form or forgot about a project they were compensated for at the beginning of the year.

You need to report all income on Forms W-2, 1099-INT, 1099-MISC, and others you may get from third parties.

Accidental errors can still lead to penalties, but if you notice you made a mistake, let the IRS know right away and file an amended tax return.

It is never wise to underreport your income, even if you think you should be paying less tax. Underreporting and the subsequent underpayment can lead to interest charges, penalties, and even criminal charges in some cases.

Working with a tax expert is often helpful when taxes become complicated.

Anxious clients often call us at the Silver Tax Group after having received a “CP2000 Notice” (also known as an Underreporter Notice) from the IRS. Most often, they want to understand why they have received the Notice and whether it means they are in trouble.

To answer the second question right up front: no, receivingan Underreporter Noticedoes not mean you are in trouble. However, it might mean you should seek the help of an experienced tax attorney.

Let’s take a look at what you should do if you receive aCP2000 Noticeafter filing your tax return.

Here’s the information a CP2000 notice typically contains:

The IRS will send you an underreported income notice if they find discrepancies in your earned and reported income. You can take steps right away if you find yourself in this situation. Here’s what to do:

1. Read the Notice Carefully

You first need to know exactly what happened. TheCP2000 noticewill tell you how the IRS came to the conclusion you underreported, including their sources of information and your tax return details.

2. Respond Right Away

It is critical to follow all instructions on the notice. Respond immediately or by the date indicated on the notice. There will be a notice form you need to complete, which states whether you agree with the IRS’s findings. You can either mail or fax your form to the address on your notice.

Agreeing with the form is the easiest option, as you will simply sign it and send it in, and then you will pay whatever you owe.

3. Submit Documentation if You Disagree

Disagreeing with the notice means you need to send in a signed statement that explains why you disagree. You also need to provide documentation to back up your claims, including corrected or missing tax forms.

4. Look for Mistakes on Other Returns

Sometimes a mistake uncovered by the IRS may appear on other tax returns, too. Look through past returns to make sure there aren’t any errors, and submit an amended tax return if you find something.

Remember: Never ignore a notice from the IRS. Doing so will only make your situation more complicated. Respond right away and follow the instructions on your CP2000 notice. You can also contact the IRS if there’s something you don’t understand on the notice.

Speak with atax professionalif you still have questions about what to do next.

Underreporting income is a big problem in the U.S., but don’t let it impact your life. Always report all income you earned for the year, even if it is not reported by a client or other third party who paid you. It is up to you to keep track of what you earn and report it properly to the IRS.

Tax laws can be complicated, and you may have a lot of questions about your responsibility, especially if you run a business or are concerned you accidentally underreported income on your tax return.

Calculating and reporting your taxable income can get complicated (which is why it’s best not to try to prepare them on your own). Despite (or perhaps, because of) the thousands of pages ofconstantly-changing tax laws and regulations that determine your liability from year-to-year, questions can arise about what you need to report and how much you owe that do not have clear answers.

Sometimes, Underrerporter Inquiries call attention to those issues, and it takes a skilled legal advisor with years of experience representing taxpayers in matters involving the IRS to identify and obtain the most favorable resolution of the alleged discrepancy.

A tax attorney can, for instance:

• Assist in the investigation of the discrepancy, bringing detailed knowledge of current tax issues to bear in seeking and obtaining information that could impact how your Underreporter Notice gets resolved.
• Advise you when to dispute a discrepancy and when to agree to a proposed adjustment.
• Craft alternative proposals for resolving the discrepancy that may serve your interests more favorably than the resolution the IRS has proposed.
• Communicate and negotiate directly with the IRS on your behalf, saving you the time, energy, anxiety, and potential risk of handling complicated tax matters on your own.
• If and when necessary, represent you in legal proceedings aimed at resolving a discrepancy with the IRS that could not be resolved through negotiation.

Every matter we handle has its own unique facts. No matter what response is called-for in the case of your Underrporter Inquiry, however, an experienced tax attorney can protect your rights and serve your interests in any dealings with the IRS.

1. Common examples of underreported income:It is important to provide examples of underreported income to help readers understand what they should look out for. Examples include: tips, rental income, cash transactions, freelance work, and investment income.
2. Consequences of underreported income:Readers should be aware of the potential consequences of underreporting their income, such as paying penalties, interest, and even facing criminal charges.
3. What to do if you receive an IRS notice:It is important to provide readers with steps they can take if they receive an IRS notice regarding their underreported income. This can include gathering all relevant documents, seeking professional help, and responding to the notice in a timely manner.
4. Ways to prevent underreported income:Offer readers some practical tips they can use to prevent underreported income in the future, such as keeping accurate records, using reporting tools, seeking professional guidance, and being proactive in identifying potential underreporting.
5. The importance of seeking professional helpRemind readers that dealing with the IRS notice can be complex and stressful. Advocating for the enlistment of experienced tax professionals who can successfully navigate the complexities of an IRS audit.

Reach out to Silver Tax Groupto speak to a tax expert about underreported income, the CP2000 notice, and any other tax questions you have.