You’d be surprised. They do tend to audit higher-income taxpayers more often. But in the hundreds of tax returns I’ve prepared - and 80% of my 1040’s have a Sch C - I’ve only had one audited.
That audit had nothing to do with business income - the IRS wanted verification that a man’s kids lived with him.
That’s why you launder the money
I don’t quite see it that way. The IRS can’t come up with it’s own tax code, that has to be done by Congress. The branches are seperate, but not independent from each other.
Speaking as someone who works at our family tax rep firm (specializing in audits, back taxes, blah blah), the rule is that no one is making you cough the stuff up. You don’t have to- the burden of proof is on the IRS.
That said, if THEY cough up some evidence, it is probably in your best interest to disclose your evidence to the contrary. Again, you don’t HAVE TO, but if you don’t, the IRS side wins.
You’re right that they’re not independent, but the separations are really quite significant. In our government, it is quite literally true that the left hand does not know what the right hand is doing.
Here’s another example: if you have a new baby, it can take six months for the Social Security Admin to tell the IRS what that baby’s SSN is, and you may have to file an extension for your tax return until the two finally coordinate their data.
Or another: if you’re an illegal immigrant and are working, you probably bought a fake SSN to work under. When you file your tax return, you do it with an ITIN instead of an SSN… so now the IRS knows that you’re an illegal immigrant working under a fake SSN. They also know your address. They know who your employer is, and that they’re breaking the law. What do they do? Send you your refund, that’s what. They don’t talk to the INS or any other law enforcement agency about it.
Of course, the problem with most crimes is not trying to find out whodunnit. It’s trying to get enough proof to convict beyond reasonable doubt.
I’m sure the local cops and the DEA have a pretty good idea who’s the drug pyramid in any location. It’s likely the odd freelancers and exact details of shipments (in time to intercept) that eludes them.
So, just because you tell the IRS “I made $500,000” does not mean you provide enough detail for a conviction. Lots of people brag about stuff they never did - ask any high school boy or girl.
So if you don’t have detailed documentation - except maybe bank deposit records - what can they nail you on? If they were to come back and say “we think you owe more” they would have to produce some sort of proof. I wonder if “you musta took 10% for spending money” would fly? Maybe, if there were no withdrawals for beer and groceries and spending money along with your deposits. The moral being, don’t lie.
You can always use the “I don’t remember the details”, and the worst they can do is calculate that you owe more money. That calculation has to be reasonable thogh. They can’t just say “We think you made twice as much” they ahve to back it up with something, such as a net worth evaluation. “You delcared $500K but we see 6 new Labourghinis in the driveway”.
Do you have to tell them what it was from? They’re not stupid, they know it was something interesting. What they may nail you on is failure to keep receipts, stuff like did you keep documentation so they can go after your suppliers or customers? Not sure if that is anything the IRS itself cares about. I know in Canada, if you have employees and don’t keep the necessary witholding taxes off of their pay, and provide the details monthly to the tax department, they will nail your cheeks to the wall.
So they pass the info to the DEA… Well, if you’re making half a million a year for a while, don’t you think the DEA already knows who you are? They just haven’t had a chance to catch you red-handed yet.
The real question is the proceeds of crime - you are laundering money. Is money laundering a crime in itself, or is the fact you don’t declare it as income the real crime.
I recall about 20 years ago an article about over-zealous stereotypical law enforcement in northern Florida who had pushed the limits of DWB, “Driving While Black” to a new extreme of highway robbery. They would pull over anyone who “didn’t fit”, i.e. wrong colour to be driving that car. If the person had too much cash on them - say, $3,000 or $10,000 and could not explain where it came from (to the satisfaction of the officer), it was confiscated. One guy said he has sold his stuff and was moving back to Atlanta. The police told him he could have his money back if he fought the “possession of proceeds of crime” in court; if the guy was telling the truth, how was he going to afford a lawyer?
Ah, America.
The IRS doesn’t get to pass the tax code, but they do get to adopt, publish, and enforce regulations governing how the code is interpreted/applied, same as other administrative agencies. The regs are a huge part of tax practice.
Not quite. IRC 162 Sez that business expenses are deductible, from whence came the Cohen defense.
However, one thing to note is that some crimes are local/state and not Federal- for example Gambling. Reporting that income (and expenses) to the Feds is safe.
Why? They audit people who they think are under-reporting income, not those who do report it.