Third Party Reporting Prevents Underreporting of Income

IRS Computers Catch $6.4 Billion in Additional Taxes

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If you make your living through your client’s payments, you may have been tempted to decline a few and underreport your income to the Internal Revenue Service.

But thanks to a successful IRS computer program, information reported by those who’ve paid you a good amount of money over the year help the IRS keep a watchful eye over your own returns.

The Automated Underreporter Program has been the IRS’s best friend over the past couple years. It helped the IRS recoup $6.4 billion in additional tax payments in 2011 alone. It works by red flagging individual tax returns citing income that seems inconsistent with payments reported by third parties like banks or employers.

About 16 million taxpayers are tagged by the computer system each year. If you get that CP-2000 Notice of Proposed Adjustment for Underpayment/Overpayment letter in the mail, you know you’ve been hit. And chances are it was just a computer that generated your case.

The AUP shows that the IRS is becoming more technology-oriented, and giving computer programs a bigger role in finding tax scofflaws. So as you report your income and pay your taxes, just know that the IRS’s watchful eye is on the lookout for those who try to avoid paying their taxes.

And if the IRS’s AUP catches up with you, it’s a sure thing an IRS agent will work your case to make sure you pay your back taxes. Avoid them long enough and a bank levy or wage garnishment could be in your future.

Underreporting your income may save you a few bucks come April, but rest assured the IRS is using every tool it can to find people who owe back taxes. Some people avoid paying back taxes for years, only to find themselves up to their neck in IRS debt.

But by working with a tax professional or maybe a tax attorney, you can get on sound financial footing and back in the IRS’s good graces. Who knows.  Maybe you can create your own computer program with all the money you save.

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