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Know Your Income

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n a previous column, I wrote that the Internal Revenue Service has so improved its computer system that it can now track practically every penny of your income and compare the total against the amount you claimed on your tax return. When the IRS finds money not reported, a computer generates a letter telling you how much you owe in taxes on the missing income (plus interest) and requesting that you pay it promptly. The letter is usually correct, but you should make sure before you send a check.

All too often, people think it's smarter just to pay up, believing that solves the problem. After all, it's a letter from the IRS saying you owe the government money. Maybe you made an innocent mistake. Perhaps you moved and forgot to inform old employers of your new address, or your agent didn't forward W-2s he or she received. If you rely on your W-2s to calculate how much income to report, you could be burned in these situations, but at least some taxes will have already been withheld, keeping your bill low. However, if the taxes the IRS wants to collect are on income reported on a 1099-MISC—meaning you were paid in cash or by check with no taxes withheld—it will assume, understandably, that you were trying to hide the income to avoid paying taxes on it.

In either case, it's possible you never received the income in question. Just because a piece of paper has your Social Security number on it doesn't necessarily mean it should. In today's world of identity theft, there are many reasons income might have been reported incorrectly. And honest mistakes can be made by bored accounting clerks typing on keyboards all day.

Paying the amount specified in that letter without first doing some research means you could be paying someone else's tax bill. Be sure the missing income belongs to you—and then make sure this kind of mistake doesn't happen again. How? By keeping track of your income throughout the year and then reporting it accurately, rather than relying on whatever tax documents were sent to you at the start of the next year.

Whatever you do, don't try to hide income from the IRS. More and more we're seeing clients get audited when even small amounts, such as interest from a checking or savings account, are missing from their return. When the income numbers don't match, the computer spits out your return, forcing an IRS employee to review it manually. That's something you don't want, especially as an actor. Most IRS workers don't comprehend the validity of our deductions, which causes our returns to be singled out for audit.

And the audit process can open up a whole can of worms. Even when you're prepared and escape without having to pay anything more, there's the time and hassle of having to go through the audit. An auditor also has the right to look at your bank statements and add up the deposits you made throughout the year. If the total exceeds your stated income by a considerable amount, you better have answers. If you loaned your sister $1,000 and she paid it back the following month, for example, you'll have to account for that extra $1,000 deposit.

As much as I understand not wanting to pay taxes, it's getting harder and harder to hide income from the IRS and, obviously, not something you want to get caught doing.

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