What Is Under Reporting?
Let me explain under reporting directly to you: it's the crime of intentionally reporting less income or revenue than what was actually received. As someone diving into this topic, I see that companies and individuals do this mainly to avoid or cut down on their tax liabilities.
You should know that under reporting isn't a victimless crime. The billions in lost tax revenue from it directly cuts into the funds the federal government uses for Social Security, Medicare, and many other programs.
Key Takeaways
- Under reporting is the deliberate criminal act of reporting less income or revenue than was actually received.
- The tax loss revenue that results from under reporting may ultimately slash the funds that Social Security, Medicare, and other federal programs need to finance their outgoing expenditures.
- Under reporting may be committed by public companies and by individuals alike.
- Those who purposely under report may face fiscal penalties, criminal consequences, or both.
Understanding Under Reporting
Consider a struggling public company facing a sharp drop in its share price; it might report lower revenues for a quarter than it actually earned, just for appearances. I want you to understand the trick: they hide revenues and then add them to the next quarter's statement, making it look like the company has bounced back strongly.
This creates the illusion of a successful quarter, which can attract investors and boost stock prices. Of course, this type of under reporting is illegal.
But it's not just stock-listed companies at fault. In most cases, self-employed people and those earning cash are the ones most likely to under report, aiming to lower their taxes and keep more money.
Here's an important point: wage and salary employees usually don't under report because their earnings are reported directly to the IRS by their employers.
Back in the 1990s, the IRS estimated that up to 84% of cash tips, amounting to hundreds of millions yearly, went unreported. And in 2019, they reported that under reporting made up about $352 billion of the $441 billion U.S. tax gap for 2011-2013.
A fast fact for you: under reporting accounted for roughly 80% of the U.S. tax gap in those years.
Consequences of Under Reporting
If individuals or companies get caught under reporting, they could face fiscal penalties, and in severe cases, criminal charges.
Remember, under reporting is only a crime if it's willful disregard of the tax code. If it's due to negligence or errors, the IRS might just penalize without criminal action.
For instance, if a waitress accidentally pockets a few bills one night instead of adding them to her total, that's likely negligence and won't lead to criminal punishment. But if it's proven as willful evasion or fraud, she could face felony charges.
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