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Thread: Another tax situation...

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    Senior Member NikkiWest's Avatar
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    Default Another tax situation...

    I pay taxes but I report well below what I earn for a variety of reasons. My area has cheap rents and most of my money does not flow through any bank accounts if I can avoid it.

    That said, this year I had a number of things happen that make it difficult to claim what I did last year, such as buying a car and needing to put a fair amount of money into a checking account at one point. Basically, it means that this year there is evidence of about $18,000 more than I usually claim.

    I talked to my CPA who knows I under report my earnings (and is fabulous about it) and suggested going two ways. One: Just report a higher earning to account for the car and extra money in the bank and pay the higher taxes (which would be a massive increase from previous years which might trigger an audit so I would need to fabricate records). Two: Don't report it, claim a touch more than last year, and be willing to come up with alternative explanations if audited (support from family) and still fabricate records.

    I have some time to decide. What do others think about this?

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    God/dess Emily's Avatar
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    Default Re: Another tax situation...

    I think it's easy to explain a jump in income. I would go with that.

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    Banned Melonie's Avatar
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    Default Re: Another tax situation...

    Again the usual 'official disclaimer' - that the law requires that you report all of your income to the IRS. With that said ...

    Another of the changes which has stemmed from increased IRS computerization and automatic reporting is automatic feedback from state title registrations. Thus the fact that you bought and registered a new car will automatically be reported to the IRS by your state motor vehicle agency ... along with the amount of the purchase, as well as any details in regard to your auto loan (if you took one) or an $18,000 cash transaction report if you didn't. IRS computers have probably already tried to compare this to income levels reported on your 2006 and previous year tax returns, and have probably already raised a yellow flag. It is highly probable that the IRS is going to expect to see a 2007 reported income that is sufficient to cover the car purchase plus local costs of living, and will start asking lots of questions if your 2007 reported income is way lower than this amount.

    I'll throw in that two NYC dancers were recently raked over the coals by the IRS as the result of registering new cars that couldn't be financially explained by their previous tax returns. Once the IRS came to the conclusion that the relatively low incomes officially reported by these dancers was a total work of fiction, the IRS then proceeded to prepare their own 'estimate' for the REAL incomes that these girls were probably earning. The IRS then hammered them with a bill for unpaid taxes on the IRS estimated amount of real dancing income going back three years ... plus penalties and interest ... which amounted to a back tax bill for more than $100,000 for each dancer ! Since the girls had no way to prove that they did NOT actually earn the amount of money the IRS estimated that they earned, they could not avoid having to pay. Not having authoritative 3rd party documentation of your income can be a 'two edged sword'.

    If you fall back on the 'help from family' angle, the IRS may also decide to check for 'gift tax' claims on the tax returns of family members. The threshold for reporting and paying 'gift tax' is only $11,000, so in the absence of several different relatives being willing to play along with your 'help from family' scenario the IRS may attempt to collect gift tax from your parents (for example) as well as auditing their tax return right along with yours.

    Your scenarios would appear to involve a whole lot of risk factors. Some involve creating risk for family members as well as for yourself. Some of your scenarios also potentially involve a technical IRS term ... 'tax fraud'.

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    Veteran Member Fionaver's Avatar
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    Default Re: Another tax situation...

    Just out of curiosity, how far back can they nail you for?

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    Banned Melonie's Avatar
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    Default Re: Another tax situation...

    ^^^ typical audits go back 3 years. However, from a legal standpoint I believe they can go back 7 years before the statute of limitations becomes a factor. Again, I'm no particular expert, but I believe that the IRS would need a fairly solid suspicion of long term 'tax fraud' to dig that deep and that far back.

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    Member Ook's Avatar
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    Default Re: Another tax situation...

    For Federal personal returns, the statute of limitations for individuals filing ammended returns is 3 years. The same applies to audits covering simple errors. The 3 year period starts at the later of the date that it was filed or the due date.

    For errors exceeding 25% of the gross income reported on the return, the statute of limitations is 6 years.

    There is no statute of limitations for fraudulently filed Federal personal returns or unfiled returns. (Source: Section 6501(c) IRS Code)

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    God/dess Zofia's Avatar
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    Default Re: Another tax situation...

    Quote Originally Posted by Melonie View Post
    I'll throw in that two NYC dancers were recently raked over the coals by the IRS as the result of registering new cars that couldn't be financially explained by their previous tax returns. Once the IRS came to the conclusion that the relatively low incomes officially reported by these dancers was a total work of fiction, the IRS then proceeded to prepare their own 'estimate' for the REAL incomes that these girls were probably earning. The IRS then hammered them with a bill for unpaid taxes on the IRS estimated amount of real dancing income going back three years ... plus penalties and interest ... which amounted to a back tax bill for more than $100,000 for each dancer ! Since the girls had no way to prove that they did NOT actually earn the amount of money the IRS estimated that they earned, they could not avoid having to pay. Not having authoritative 3rd party documentation of your income can be a 'two edged sword'.
    The same situation happened in Indy when I was dancing. The IRS can be relentless. Tread very carefully with underreporting or outright tax fraud.

    Z

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    Senior Member NikkiWest's Avatar
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    Default Re: Another tax situation...

    Thanks Melonie for the advice. I didn't realize they could audit my relatives as well. I guess that makes the decision a bit easier.

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    Banned Melonie's Avatar
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    Default Re: Another tax situation...

    ^^^ the IRS can certainly audit any other persons to which there is financial 'linkage'. That 'linkage' can be via a gift claim / gift tax, it can be through student loan applications where both the student's income and parents' income were used to determine grant eligibility, it can be between a club claiming business expense deductions for payouts to dancers versus those dancers' declared incomes etc.

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