If you receive a paper paycheck from your employer instead of a direct deposit, you have two primary options: (i) you can deposit the check into your bank account, or (ii) you can cash your paycheck and get access to your funds immediately.
If you cash your paycheck, will the IRS know? Or, can you avoid reporting your income to the federal government if you don’t have a record of deposits that the IRS can trace? The short answer is: The IRS will know, and not reporting your income can have serious consequences.
How the IRS Knows About Your Income
When you earn income, you aren’t the only one that is required to report your income to the IRS. Your employer is required to report your income as well—and most employers do so.
Employers must report their employees’ income in order to pay the federal employment taxes they owe. They must also report and remit the FICA taxes (Social Security and Medicare) that they withhold from their employees’ paychecks. For employers, failure to pay the employment taxes they owe (both the company’s share and their employees’ share) can have serious consequences—including criminal consequences in some cases.
Employers can also deduct their payroll expenses to reduce their federal income tax liability. To deduct these expenses, they need to clearly document the wages and salary they pay. In the event that the IRS audits the company’s income tax returns, the company must be able to substantiate its claimed payroll deductions with records it has on-hand.
In short, your employer has several reasons to report your income to the IRS.
If your employer reports your income to the IRS and you don’t, this can lead to a tax audit. If the IRS determines that you have intentionally failed to report your income, it can also lead to a criminal tax fraud investigation. Tax audits can lead to liability for back taxes, interest and penalties, while criminal tax fraud investigations can lead to fines and prison time.
What to Do if You Haven’t Reported Your Income to the IRS
Employees who have failed to report their income to the IRS need to be very careful. While filing a late (or “delinquent”) return is one option, this can trigger IRS scrutiny. Reporting multiple years’ income on a single return (referred to as a “quiet disclosure”) can trigger IRS scrutiny as well. In this scenario, your best option may be to make a voluntary disclosure, but before you do so, you need to make sure you are eligible to receive the protections that are available.
Discuss Your Situation with Tax Lawyer Kevin E. Thorn in Washington D.C.
If you have been contacted by the IRS, or if you need to know more about your options for addressing a failure to file, we encourage you to contact us promptly. To request an appointment with tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033, email firstname.lastname@example.org or contact us confidentially online today.