Case: Yakov Kobel, et ux. v. Commissioner, (2013) TC Memo 2013-158

With so many years of the Great Recession behind us, taxpayers have become creative with hiding income from the government.  In this case, the taxpayers had deposits during the year which were more than their reported income. The IRS always checks this! Taxpayers incorrectly feel that if they don’t receive a Form 1099 or Form W-2, the income is not reportable. THIS IS NOT TRUE. You have a duty to report all income that you receive for work, investments, etc… regardless of whether you receive a Form 1099 or Form W-2.

Standard of living reconstruction: The IRS also is allowed to add income to a taxpayer’s return in order to match the taxpayer’s standard of living. In other words, if your reported income won’t pay your mortgage and basic living expenses… the IRS will add income to your return.

Outcome: If the return is a few years old, the penalties and interest can be as much as the tax owing. It’s much less expensive to report properly up-front in the year you earned the income.