Tax Scofflaws: How are they caught?

Factual Questions
1

The other day I was chatting with Tom at a local bar. I’m not sure what the PC term is, but I would describe Tom as “slow”. He is a nice guy with a drinking problem and just barely enough cerebral ability to live on his own.

Tom works a few different minimum wage type jobs. He also just started cleaning apartments for the owner of a small apartment building. He was proud to have just been paid for cleaning a unit, and he got out his wallet and showed me his paycheck, which was just a personal check written by the building’s owner.

I commented, “It’s too bad that’s before taxes”. That led to a long discussion, and when Tom got worked up I changed the subject. It seems he assumes his pay already has had taxes taken out, just like his other jobs. I’m certain this is not the case.

So. . .do people like Tom get caught, and if so, how?

2

Tom files his taxes and includes the income from the apartment job. With out a w2 questions may be asked. Then the IRS looks at Tom’s boss for paying “under the table”.

Or his boss gets audited for some reason and the IRS begins to look at his books and discovers who he has beenpaying under the table.

3

Of course the IRS isn’t exactly focusing much effort on minimum wage Tom who is earning a bit on the side as an independent contractor. If that is the only under the table work he is doing he likely will escape notice entirely.

In my experience the IRS isn’t so concerned with a taxpayer reporting more income than his W2s show.

4

There’s nothing wrong with a personal check, but I’ll assume you determined that nothing was being withheld just through the conversation.

Employers get caught when people rat on them. This can take the form of the employee innocently trying to straighten out their taxes.

The apt guy will probably just attempt to show that Tom was doing contract work, not as an employee, so nothing was improper. A 1099 would still need to be filed though and then Tom will be asked to pay his taxes. He was going to file either way, right? He’ll find out then. Unless he lies on the return there’s nothing to get “caught” for. The lack of estimated payments isn’t a big deal.

Why not just clarify all this beforehand though?

5

IANATL

There are filing thresholds that aren’t zero, for employment income I think it is around $6K a year? Some types of income have no such minimum.

And just a WAG but I assume the IRS like all entities with limited time prioritizes cases. So the tax scofflaw who earned a few hundred a year and doesn’t owe anything anyway might not be a priority, so they may know of him but just haven’t brought the hammer down yet.

6

Well, because he is “slow”. Very slow. He assumes his employer is responsible for taking out taxes. He told me what he was paid an hour for apartment cleaning. He spent two ten hour days working on a unit and showed me his paycheck. I did the math.

If the building owner sends him a 1099 it will just muddy his waters, I’m afraid.

7

An answer above is likely correct: if he declares more income than documents can account for, then he may be penalized by the IRS. Not a big deal, and normally not grounds for an audit or prosecution unless we’re talking huge bucks. The basic IRS definition of tax fraud is failure to file, which is how Wesley Snipes got himself in deep yogurt. There are other reasons for red flags to go up, but that’s the big one.

8

IF he is just being hired for a temporary apartment cleanout type thing, most likely the apartment owner will pay him as a contractor, it would be way more paperwork than its worth to hire him for 2 days work. If its less than $600 in a year, no 1099 tax paperwork from the apartment owner would be needed. Depending on how the apartment complex does their books, he could do alot of this type of work generating little or no suspicion from the IRS so long as he files his returns.

9

Where Tom gets caught is when the apartment owner files his taxes and deducts the money paid to the contractor who cleans the apartments from the income he earns on rentals. The IRS will want to know to whom this money was paid.

I suppose the owner might not bother deducting the rather small payments to Tom, and if he doesn’t there’s not much chance Tom would get caught.

10

My only concern for tom would be, if he is assuming he is an employee and the jobs he is taking are legally contract work, he is not covered by any kind of workmens comp type insurance. This will turn into an EPIC shitstorm if he gets hurt on a jobsite and trys to file a claim.

My dad ended up going through 8 flavors of hell proving that an under the table guy hired by a subcontractor was not his responsibility. This kind of thing would really suck for him and those who hire him. In addition, depending on the type of work, Charging more then $500 in services could run him afoul of contractors licencing issues which pack some UGLY fines.

11

IF he pays Tom less than $600 in a year he would not have to specify Tom personally just “cleanout services” and claiming to hire random guys from craigslist but never more than $600 to any given one.

12

You’re talking pennies here, man. A guy making minimum wage will never get in trouble for something like that - it would cost the IRS 10 times as much as they could possibly collect just to investigate it.

13

Yes. The IRS has to prioritize its enforcement priorities. Some people - not many, but some - probably go their entire working lives on minimum wage, or even less than that, and never pop up on the IRS’s radar.

14

This is true of an individual low-wage earner, but not as a class.

IRS has definitely developed somewhat onerous rules to tax lower-income groups. Waitresses can be taxed on tips expected even if not received. Taxicab companies are forced to treat independent drivers as employees (to get W2 withholdings from their independent earnings?). Et cetera.

Meanwhile, many higher-income independents, e.g. lawyers, can, if they wish, get large fees invisible to and unreported to IRS. (My own lawyer sent his secretary along to collect his fee when I cashed a settlement check made out to me.)

15

Most lower income peoples’ tax problems are going to be a lot simpler to investigate than some big-time fraudster with a slimy lawyer obfuscating their finances, though. It doesn’t take a team of tax geniuses to figure out if someone didn’t file a return or didn’t claim some income that their employer sent in. With computers identifying obvious red flags, a single IRS agent can probably prosecute dozens and dozens of small-timers in the time it would take to do even part of the legwork for a big time fraud case.

16

So your friend may get away with it for years - he gets no tax form from his “employer”; he fills out his taxes, per instructions on the form, by adding up all the income for which he has forms - which will include tax deducted. Nobody will notice…

Until one day when the building management company is audited. Of course, another possibility is that the building manager wrote a business cheque for “CASH”, pocketed that, and paid your buddy with a personal cheque, specifically so that there would be no trail from the business to buddy. I assume in this scenario if it’s not his business (or even if it is) he pocketed an “expediting fee” in this transaction as unreported income to himself too.

After all, if he uses the “unknowns from craigslist” story, and the units did need cleaning, how likely is it he’ll have to worry - unless he gets greedy and the IRS says “too much for anonymous casual workers” or someone talks.

The problem with “working under the table” is not so much getting away with a payment, it’s getting a regular paycheque. While buddy could get some serious beer money this way, if he starts making a regular living wage, it’s coming from somewhere. Unless the guy manages 10 or 20 building companies and spreads the load around, it will eventually be noticed if he’s shelling out $30,000/year or so. This is why home repair contractors are the ones most able to do this trick. They have hundreds of customers spread all over the place who are generally untraceable.

Another trick the IRS can do in extreme cases, I assume (Canada does it) is an personal assessment. You live in a house that costs $X, you drive a car that costs $Y, you must buy gas and groceries but we see no weekly withdrawals from the acount you put your paycheque in. Evidence points to you having an income of $Z so we assess you the following tax unless you prove us wrong…

I see where the Canadian Revenue Agency, for example, swooped into a St Catherines area restaurant, tallied up all the tips on receipts (good old Visa!) for the last 2 years, and demanded the waiters pay back taxes (and penalties) on that. While often the small fish like your friend are not worth chasing unless they fall into the government’s lap, in this case apparently that audit prompted updated returns from many of the servers in the area.

17

I’ve known lots of people who work in marginal jobs like that for their entire lives, never pay taxes, and never get caught. The IRS does actually catch low income people who do this, but the odds aren’t great of any one individual getting in trouble for it.

18

I feel better knowing this and am glad I started this thread. Personally, I am overly cautious with my IRS dealings and feared they’d swoop in on this guy any day.

19

:dubious:

I can see being penalized for declaring less income on one’s return than is shown in documents, but being penalized for more income than is shown in documents?

For several years now I have been declaring more income on my return than can be shown by official printed documents. I have a small internet business, and about half of my customers pay via personal check. These checks don’t show up on any W-2 or 1099 or anything like that; I just declare them as income from my business and go on about the rest of my tax return.

On a slightly related note, people who fabricate numbers for their tax return often do a poor job, triggering an audit that catches them.

20

Most of the people I know basically fall into the category of your friend. They have marginal income from legitimate sources (some of them maybe a bit better than minimum wage, earning $25-30k legitimate income) and then do odd jobs like really small contracting jobs (say tiling a bathroom) that a lot of homeowner’s don’t want to pay the price for a fully licensed and professional contractor to do for them. Consequently the job is done cheaply and typically for cash or personal check with neither side doing anything that could get it reported to the IRS.

In any given year maybe 5-10% of their take home comes from this sort of stuff, and they never get caught because at those numbers there isn’t anything that will immediately make it super obvious you’re “living above your means” and the transactions don’t trigger a lot of IRS involvement at all.

Your friend getting paid by the owner of a small apartment building, it would be pretty easy for that business owner to do it all 100% under the table. Yeah, if he’s reporting to the IRS he has your friend Tom working for him as a 1099 contractor and Tom doesn’t report any 1099 wages then there is a potential for an audit to get triggered (but even that obvious red flag does not typically trigger an audit 100% of the time.)