The case in Canada (and I assume the USA) is that if you have a lifestyle that your declared income obviously can’t support, they will do an assessment of the lifestyle and demand back taxes and penalties.
Nobody cares about the taxes of homeless people. They care about people who have the car and housing that suggests, let’s say, $100,000 a year or more, but declare a fraction of that as income. Or the contractor who has a nice new truck and a trailer full of fancy power tools while delcaring $30,000 the last few years…
If you rack up bar bills and restaurant tabs, pay with cash, pay credit card bills with cash, your Mercedes (according to the dealer’s service records) has put on enough miles to have needed thousands of dollars in gas, etc. - they will simply demand that you account for your income and pay taxes on it. Otherwise they freeze you bank accounts, seize your assets, etc. - and charge you with tax evasion. Being uncooperative is a quick way to rack up the frequent patron points at Club Fed.
It may take work for the IRS to get you in their sights if you are small potatoes, but once they latch on they are not going to let go until they are satisfied, and they hold all the cards.
and sadly, according to my sister (who worked in an IRS unit that identified alot of it) it often ties back to social workers and such who teach their clients how to maximize it.
Want to trigger a doublecheck on everything, claim maximum EIC, EVERY one of those returns is subject to additional scrutiny.
I’m pretty sure they do have to have proof. If you must have spent X then surely that’s proof that you must have at some point had X as income. That income may be deductible, but that’s up to you to prove. Even if you just found a Mercedes on the street with the keys in it and the title unsigned and no one claimed it despite your doing everything possible to track down the owner, and the cops said that you could keep it, that’s still income. I have no idea if it’s taxable income, but it’s reportable income, and if you failed to report it and didn’t keep any records to show how you found it, and the cops deny ever telling you to keep it, and you answer all the IRS’s questions with “I don’t remember; it’s just mine!” then how much more proof do you think they need?
You can actually see that on the chart Rigmarole posted. The bottom income bracket gets investigated at a much higher rate then the “middle class” brackets, even though the IRS presumably gets little or not tax revenue out of them. Presumably its due to investigations of EITC fraud, and fraud involving other benefits.
Yeah at some point you had X as income. Throughout your entire life. I don’t know what a Mercedes costs, let’s say 60k. If our “crook” is 30 years old, paying a token amount of taxes for his 12 year working life, that’s only 5k he needs to have “saved” per year. In cash. He’s already (hopefully) filed 60k of income in his life and there is nothing that needs to be proven.
If you read the Internal Revenue Manual, which is freely available on their site with dollar threshholds redacted, you will read all about the trouble this defense raises for them. One of their questions during an audit is supposed to be “Do you keep large amounts of cash around?” If you say no, you cannot later claim the “mattress defense”.
The IRS may have awesome power, and it certainly does when it comes to collection, but they don’t have crystal balls and they can’t do half the things I’ve seen mentioned in this thread.
This is the point - they don’t need a crystal ball.
All they need is to show that you have had income (as demonstrated by out-go) of $X.
Then it’s up to you to prove it’s legit.
For the average Joe with a standard wage and a bank account, this is not aproblem, it will all be right there - and these are the “middle income” people that don’t get investigated much because the electronic/paper trail is all right there. Your paycheque goes into the bank, your monthly savings goes from there, your rent is paid by cheque, your credit card bill is paid from the bank, your groceries are bought by cheque… it’s pretty obvious to anyone with access to those records.
If your total banked cash is about the same as declared income, that would be a problem. that’s where they look at things like “you are not starving, but you obviously are fed and have gas in the cars despite the entire household income going to the bank, car payments, and mortgage. Care to explain?”
They don’t have to dig into your finances - unless you are considered a crime figure and they want to put you away. Instead, they come up with their own magic number without a great deal of inspection, and it’s up to you to prove they are wrong or pay what they claim. You provide the acounting details. Lie on that and you just make things worse.