Paying Taxes on the Honor System

[skipro33]

Proof is a two-way street. The IRS has to prove you owe the money too if they challenge your return. Also, if your intent is to commit a crime as opposed to an honest error, that to is weighed in.

 

[Original Wally]

Proof is a two-way street. The IRS has to prove you owe the money too if they challenge your return. Also, if your intent is to commit a crime as opposed to an honest error, that to is weighed in.

They will state that the entire payment is income. YOU would have to establish a basis to reduce the amount of tax due, AND a holding period to get LTCG instead of STCG

 

[G POP]

If this $ and stock was received for work performed as a consultant, you could/should have expenses. I would add up all expenses incurred while you were performing the work. Come up with a cost basis for the stock portion. Deduct all previous taxes and expenses from the transfer and then pay those cap's gains taxes. Looks like at least $100K in gravy if you ask me.

 

[Original Wally]

Since it was "earned" years ago, and (presumably) not reported as income:

The statutes have run on those years. [3 years unless 25% under reporting of INCOME - then 6 year statutes. IF intentional tax evasion, no statutes <- Burden of proof for evasion is on the IRS. PROBABLY not applicable]

Would have to research the effect of NOT reporting the income back then would have on any basis you COULD have otherwise claimed. Not sure if NOT claiming the then income would preclude you from claiming the value of the work as basis. Too retired to do that research -> but gonna bet that there has been one or more cases to give guidance.

Shrug -> not MY tax return. LOL

 

[Koolau]

Proof is a two-way street. The IRS has to prove you owe the money too if they challenge your return. Also, if your intent is to commit a crime as opposed to an honest error, that to is weighed in.

I think they do have to prove fraud but I'm not sure they have to prove underpayment - I think adequate payment is left to the tax payer to prove though I'm no expert.

 

[Original Wally]

I think they do have to prove fraud but I'm not sure they have to prove underpayment - I think adequate payment is left to the tax payer to prove though I'm no expert.

You are correct. I was really referring to basis. They could say that basis = zero. That the entire amount is gain.

 

[Koolau]

You are correct. I was really referring to basis. They could say that basis = zero. That the entire amount is gain.

What I've always wondered is how IRS "knows" to question someone's stated basis. Do they just chose every 5th return and say "prove it?"

 

[Sorcerer]

Pay the IRS. Peace of mind. If it was cash and there weren't electronic records, I would say the opposite. It's documented now.

 

[mystang52]

I'm late to this thread. Last paragraph in the OP pretty much says where the OP is leaning anyway, and definitely should follow that instinct.

 

[Original Wally]

What I've always wondered is how IRS "knows" to question someone's stated basis. Do they just chose every 5th return and say "prove it?"

There IS some randomness to it. I think basis questions are VERY rare.

BUT, there is a Taxpayer Compliance Measurement Program audit. (dunno if it is still being done). That is purely random. Unlike a regular audit where ONE item is being questioned [say medical deductions] a TCMP audit is from stem to stern. Document EVERY ITEM on the return. Period. All of your cash deposits [are you "inadvertently" missing some income?]. EVERYTHING. The POINT of a TCMP is NOT to directly generate revenue. Rather it is to identify places where (ahem) "errors" occur. The info is used to build a statistical database and create a Discriminant Function (DIF) scoring system. THEN returns are checked against this database and if enough of a difference occurs -> audit notice. Say, for example, that charitable deductions are WAY above the "norm", or you have a Schedule C in a known cash business ... these things may trip the audit letter - which would then normally be a single item audit: JUST the charity or JUST the business.

YEARS ago I was a member of an Accounting association and we had a rep from the IRS come to one of your meetings and talk about stuff. VERY interesting.

 

[jazz4cash]

What I've always wondered is how IRS "knows" to question someone's stated basis. Do they just chose every 5th return and say "prove it?"

If we really knew what all the flags are it would be easier to evade.

 

[MichaelB]

I'm wondering what others would do when the temptation is to do nothing and wait and hope the statute of limitations runs. For me, I'm at the point in life where I don't need those headaches

Many US taxpayers living abroad with foreign sourced income face this regularly. There is no foreign sourced reporting to the US Treasury (aside from FATCA), so there’s no audit trail to the income. The IRS would need to obtain access to foreign sources, which is not easy.

The risk is there is no stature of limitations when fraud is suspected. When foreign sources income is not reported penalties and intererst can exceed the total value of unreported income. It is truly (and deliberately) onerous.

The one way the Treasury can detect the funds is when they are transferred from a foreign source into the US. That does create a record of the transaction, which can then be used to investigate.

 

[Chuckanut]

If we really knew what all the flags are it would be easier to evade.

I imagine AI will be looking for suspicious patterns soon, if it already isn’t doing so.

 

[COcheesehead]

If we really knew what all the flags are it would be easier to evade.

TT runs an audit scan on my return so there must be some indicators.

 

[SecondCor521]

TT runs an audit scan on my return so there must be some indicators.

TT probably is just using common sense checks and things that would actually cause the return to be rejected. The actual audit algorithm the IRS uses is, as alluded to above, a well kept secret for obvious reasons.

 

[COcheesehead]

TT probably is just using common sense checks and things that would actually cause the return to be rejected. The actual audit algorithm the IRS uses is, as alluded to above, a well kept secret for obvious reasons.

It’s not about rejecting the return. It calculates a probability of audit. Likely looking at lots of deductions, home office, etc.

 

[SecondCor521]

It’s not about rejecting the return. It calculates a probability of audit. Likely looking at lots of deductions, home office, etc.

OK. I don't use TT, but if I did and I were interested in that feature, I would want TT to lay out how the feature works. My cynical side suggests it is just a SWAG and it's marketing to get you to buy their audit insurance.

 

[COcheesehead]

OK. I don't use TT, but if I did and I were interested in that feature, I would want TT to lay out how the feature works. My cynical side suggests it is just a SWAG and it's marketing to get you to buy their audit insurance.

Quick summary from TT

The meter provides a general guideline for your potential audit risk (low, medium, or high) based on common IRS audit triggers and historical data. It is designed to flag entries that might be scrutinized, such as unusually high deductions or reporting significant losses on a Schedule C business.

It’s free and included with the package. There is no additional charge.

 

[USGrant1962]

TT and HRB software provide audit protection and have for many years. They have audit data.

 

[COcheesehead]

Posters are confusing two things. Audit protection is an insurance coverage and you pay for it. The audit scan is a deep dive into your return to determine an audit probability and it’s free.

 

[USGrant1962]

Posters are confusing two things. Audit protection is an insurance coverage and you pay for it. The audit scan is a deep dive into your return to determine an audit probability and it’s free.

No. Sorry I didn't mean insurance, I used the wrong word. For once I didn't look it up so the pedantic came in. Anyway, TT and HRB both include support to assist with your audit and have for decades. They have data from that service to inform their audit scans. In addition, TT seems to offer paid audit defense, and they have that data too. Not sure about HRB.

TurboTax Audit Support Center

We can help you with your letter or notice from the IRS.Addressing your letter or notice as soon as you receive it could prevent further IRS contact or examinat

ttlc.intuit.com

https://www.hrblock.com/tax-center/support/online/online-tax-filing/after-filing-online-return/worry-free-audit-support/