Not reporting all the income that has been reported to the IRS by:
- Form 1099-MISC if you are a sole proprietor, independent contractor or you receive royalties
- Form 1099-K if you use credit cards processors or PayPal
- Schedule K-1 if from a partnership or S corporation
Some ways in which this can happen may be when you receive cash payments and don’t record them or you don’t deposit that check you received and just cash it. Or, you wait to deposit the check until after December 31st but your customer reports the payment on the 1099.
Why this is a big deal:
- The IRS is on the hunt for Schedule C filers who under-report their income. They call this the “tax gap” and they suspect that there’s $385 billion to be collected.
- There’s civil penalties and interest assessed on an underpayment of taxes. This can amount to big bucks!
- If the IRS thinks that fraud is involved, they can pursue criminal penalties. Now you have to, not only pay the penalties, but you will have to pay legal fees to fight the criminal charges.
To keep the IRS off your back confirm that the gross income you report is greater than or equal to the sum of the 1099s and K-1s you receive for your business.