Can You Be Outed By. . .

It depends a lot on what you mean by "the secret cottage industry I have crafted to hide play funds." If you're talking about an off-the-books business that generates cash that you don't tell your family about and don't report on your tax return, yeah, that is exactly the type of thing the IRS would want to know about. [*] In fact, the single largest component of the so-called "tax gap" -- the difference between what the IRS should received under the tax law as written and what they actually receive -- is almost certainly not agressive tax planning, fancy offshore tax shelters, multi-national corporations with hordes of expensive tax lawyers, or "the filthy rich." It's small, Mom-and-Pop cash-based businesses that just take some of that cash under the table and never report it. Yep, those are the most typical "tax cheats."

The IRS would like to catch those folks, but it's not at all easy. The overall effort required versus likely return is not cost-efficient. The individual taxpayer like that is avoiding taxes, but not a huge amount; they account for a large portion of the tax gap only because there are so damned many of them compared to, say, the number of multi-national corporations with assets of $1 billion or more.

If you are selected for an audit, the IRS often just asks for substantiation of your deductions and then checks your income to, e.g., information returns from your employers, brokers, banks, etc. as to how much income you earned. If you run a business, they'll likely ask to review the business' accounting records. Definitely if you run a business, and maybe even if you purport to be a wage-earner only, they can and will get bank statements, brokerage account statements, etc. (possibly credit card statements as well, not to mention Ebay or PayPal) looking for deposits and making sure that all of them are "accounted for." If you have deposits of $150,000 shown in your bank accounts but report income of only $120,000, they'll require you to explain where the other $30,000 came from and they'll want documentation. Saying it was a gift or loan from family members won't be enough. Essentially, they start with the presumption that any accretion to wealth (e.g., deposit to your bank account) = income and you'll have to prove it isn't. So, if your bank statements include unreported income, you'll wind up having to pay tax (and penalties and interest) on it. And the audit result itself will raise the visibility and may lead to questions from SO and family.
If you are audited, whether they're likely to turn something up which would be a surprise to your SO or family depends a lot on the specific details of that "cottage industry." Trading on eBay? Easy to find. Day-trading? Easy to find. Under the table sales from a business you report on Schedule C (or a separate corporation)? If they become suspicious, easy to find. Asking for extra money back on a credit card purchase, for something that you don't deduct? Unlikely they'll even look or care. Withdrawals from the ATM that you don't mention to your SO? Unlikely they'll even look or care -- it's deposits into your bank accounts, rather than withdrawals, that they're concerned about.

[*] If you are reporting that income on your tax return, but your SO isn't aware of it, the audit could create a problem. If you tell the IRS "I earned $30,000 from trading on eBay, for which there was no information return, but here is where I reported it on the return" . . . the IRS is happy. But if your SO wasn't aware you were doing that, and asks what happened to the money you earned, you still have a problem. Originally Posted by Chevalier

That is exactly the answer I was looking for my situation--thank you.

I assumed that the fear of outing was because it was a joint return, and his wife is involved in dealing with the auditor to some limited extent. Outside that, or unreported income or improper deductions, there's not a lot of risk of "outing." Originally Posted by Chevalier

BINGO!
__________________

Chevalier, et al, thanks for the expansions and clarifications.

However, one caution to those who file JOINT tax returns.

Pray that your s.o. doesn't ask (much less demand) that you explain every line on the return.

Yes, if you are filing electronically, the s.o. doesn't necessarily see the return, so wipe your brow.

And pray that s.o. doesn't have cause (such a divorce filing) to examine the marital estate nor s.o.'s attorney hire a forensic accountant to look for hidden assets, which invariably will start with an exam of the last five or ten year's returns. And the IRS will send copies of those to anyone who was listed as a taxpayer on such returns.

I cannot at this point swear that EBay or PayPal (etc.) do or don't report transactions to the IRS, but much better to assume they do and to pay the necessary taxes.

EFT (electronic fund transfer) is something that is moving very quickly to the top of the IRS watch list; it's been there since back when for several other 3-letter agencies.

Money Orders and Western Union, so far, don't appear to be as closely watched -- yet.

But the Islamic "hawala" individual money brokers have been singled out due to the potential for terrorist users. Most of the hawalas seem to use either the phone or email to confirm transactions, and both can be vulnerable to government oversight.

Nope, not one bit. I pay taxes on every penny I earn. And anybody that doesn't pay taxes on any substantial portion of their income needs to go to prison, in my opinion. We all reap the benefits of government programs equally, we all should pay our fair share. I have no sympathy at all for tax evaders. In my mind, they are among the lowest forms of criminals because they are not just stealing from one person, but they are stealing from every fellow citizen. Originally Posted by TexTushHog

But if you put all of your provider friends in prison, but with whom would you take companionship?

@ Chevy - great post(s), pretty dead on relative to my understanding.

The only problem you (Anonone) may have is getting caught with your pants down about income you don't report that supports your hobby.

As pointed out the IRS doesn't care how you spend your money, as there are still enough untraceable (cash), completely legal ways to blow a small fortune (casino blackjack, nice restaurants/nightclubs).

Kind of off topic and more around the topic of how to hide money from your wife for use in the hobby, but I've suggested for years one of the best ploys is take up an expensive (legit) "hobby" like casino gambling, golf, the ponies, etc. or collecting something (antiques, art, sports memoribilia), that she has no interest in, and just appear to her to be really bad at it. As long as you tolerate her spending, likely she'll do the same with yours.

As a tax professional, I would simply say say "Report all of your income". If you don't, that's the easiest way to get in trouble!

abdclub

"Mr. 3000, Where did you you spend that extra $90,000?"

"I spent half of it on women and booze. The other half I wasted."

First, let's understand one thing. Fundamentally, the IRS can pretty much do what they want. They are the worlds most relentless and ruthless debt collectors.

Can you be outed? You betcha! What are they looking for? Right now, in this business, they are working with LE and going after significant unreported income. Big Bucks. Like the owners of agencies and of providers who have tons of reviews and clients who do not report their income. Income derived from illegal activity is money laundering, whether it is the result of a misdeamenor or not. That charge has teeth. Many years in prison without parole too. In addition to tax fraud, wire fraud and fines and penalties and you still owe the back taxes. In many locations throughout the US, IRS criminal investigation agents are working with local and other federal LE to shut down medium to large agencies. For example, if you see an agency out there that has 10 to 15 girls constantly working, they are after them. They will send in a guy to nail one of the providers and get her to give up the agency. In Houston, an individual ran an agency and underreported income of some $2M over several years and evaded some $600k in federal taxes. He got 7 years and a $250k fine and he owes back taxes, penalties and payroll taxes for his employees! Ouch! So, the rule her is to always report your income and your expenses. A log book will suffice for income and remember.....how can you pay for every thing if you don't make any money? They can track property transactions, bank accounts, dmv records, etc.

Teresa, I beg to differ.

Revenue derived from anything illegal is (after legitimate expenses) ONLY income.

If it is reported properly as income (no need to specify the source as illegal) I doubt that it is subject to the laundering charge.

The illegal activity that produced the income could be chargeable. And, of course, ill-gotten gains can be subjected to confiscation laws.

I know of one agency that was busted, but after more than 2 years of investigation, no tax charges. They had paid their taxes and reported on 1099s all of their provider/independent contractor payments.

More than a few providers I know regularly file their taxes and sleep well at night, too.

Regarding the matter of Randall Bradley Jones of Houston, Texas. He owned Amazing Promotions Group aka Escape Lounges. Claimed income of $140k but actually had income of $667k. This would have been reported on form 1040 line "other income". He was turned in by some of his providers in a dispute over the split. For the tax fraud, he got 5 years, restitution of $1.2M, a $15k fine to the IRS and had to pay the back taxes. He is awaiting trial on money laundering and wire fraud as it was determined that the movement of providers from place to place, etc. appeared to skirt organized crime statutes. Also, many of the providers, some who turned him in as well as others, are facing tax fraud and money laundering charges as well. Obiviously not the sharpest bunch of people. I mean, if I had a business where the girls were doing all of the dirty work and all I had to do was go by and pick up the cash.....I think I would report it and pay the taxes.

BTW...one of the providers called LE to complain that she had been robbed by her boss, that he was taking too much. So this enterprising investigator interviewed all those who were working that day.....got them to pass him on to some girls at the other locations in order to "help them"...then he comes back with a warrant and IRS criminal investigators and FBI and takes the whole enterprise down. Several of the girls kept detailed records and knew exactly how much they were "owed"...and they didn't report it on their returns. Also, the girls dropped the owners share in a drop box.....why didn't they drop less? It's a very sad comedy!!!!!!!

Regarding the matter of Randall Bradley Jones of Houston, Texas. He owned Amazing Promotions Group aka Escape Lounges. Claimed income of $140k but actually had income of $667k. This would have been reported on form 1040 line "other income". He was turned in by some of his providers in a dispute over the split. For the tax fraud, he got 5 years, restitution of $1.2M, a $15k fine to the IRS and had to pay the back taxes. He is awaiting trial on money laundering and wire fraud as it was determined that the movement of providers from place to place, etc. appeared to skirt organized crime statutes. Also, many of the providers, some who turned him in as well as others, are facing tax fraud and money laundering charges as well. Obiviously not the sharpest bunch of people. I mean, if I had a business where the girls were doing all of the dirty work and all I had to do was go by and pick up the cash.....I think I would report it and pay the taxes. Originally Posted by TexasTeresa

BTW...one of the providers called LE to complain that she had been robbed by her boss, that he was taking too much. So this enterprising investigator interviewed all those who were working that day.....got them to pass him on to some girls at the other locations in order to "help them"...then he comes back with a warrant and IRS criminal investigators and FBI and takes the whole enterprise down. Several of the girls kept detailed records and knew exactly how much they were "owed"...and they didn't report it on their returns. Also, the girls dropped the owners share in a drop box.....why didn't they drop less? It's a very sad comedy!!!!!!! Originally Posted by TexasTeresa

It isn't the business that led to the problems...ti was the failure to report income, and it was SIGNIFICANT income at that. That's probably attributable to the owner's greed since apparently he wasn't splitting with the girls right or filing correctly.

As many on here have said, as long as you report income appropriately, you should be safe.

And, Oh, BTW, most of us have no sympathy for criminals who have been arrested for failing to pay taxes like we do. Escorting is an excuse to blame LE for their troubles when it is really their failure to pay their rightful taxes.

Just curious if you guys think all the providers should pay taxes on they're income? And how do you suggest they do that? Do you look upon them as criminals for not doing so?

I prepare tax returns for several providers. There are ways and ways! Just sayin"

abdclub

And besides, unless you file jointly, who would they be outing you to?

Mostly, the IRS's remedies consist of denying a deduction, forcing you to pay additional taxes, plus interest. Or determining that you under-reported income, assessed an additional tax plus interest.

Extremely few of these cases are referred to the US Attorney for prosecution. The bar for prosecution is high, and there are a number of hoops through which the IRS must jump before the US Attorney will prosecute.

So being "outed" is pretty far fetched, IMHO. Originally Posted by charlestudor2005

just my few cents into it, i think us providers should be more worried about that then you. Your spent/deductible expenses are not the one being scrutinized as much as your gains, unless you are foolish enough to report your hobby expences as some sort of deductuble. Compared to what you spend on a date meeting ($$$), do you really whant to turn in that gas receipt? bar tab? elevator ride? :-) if ithats your personal expence and you put it as such then why should they look at you differently?

Just curious if you guys think all the providers should pay taxes on they're income? And how do you suggest they do that? Do you look upon them as criminals for not doing so? Originally Posted by racitraci

just my few cents into it, i think us providers should be more worried about that then you. Your spent/deductible expenses are not the one being scrutinized as much as your gains, unless you are foolish enough to report your hobby expences as some sort of deductuble. Compared to what you spend on a date meeting ($$$), do you really whant to turn in that gas receipt? bar tab? elevator ride? :-) if ithats your personal expence and you put it as such then why should they look at you differently?
Originally Posted by adrianax2x

I prepare tax returns for several providers. There are ways and ways! Just sayin"

abdclub Originally Posted by abdclub

Yes, I think Providers should report their income and pay taxes on it like all the rest of us. If you don't, you deserve to be a target of the IRS. But not for providing...for failure to pay taxes. And it doesn't matter what I think. It is a crime by law.

There are ways to do it as abdclub says. I don't know if he is soliciting doing more returns, but you might pm him.

There was a thread on the motherboard a couple years ago in which providers were encouraged to file tax returns.

Finally, I don't think anyone who fails to pay their fair share of taxes is going to find much sympathy here or anywhere. It just makes our country weaker!!!