No no.. I see how you misunderstood what I said. I asked "How the hell are we taxed" because there is no paper-trail. Most of us are paid by cash. Noone is making us pay taxes. It is by choice and if you choose not to it has it's consequences. I also see how I could have misunderstood what you posted earlier. Oops.
Originally Posted by Naomi4u
The IRS has formulas it uses for industries that have no/little paper trail. Take restaurants, for instance. Most waiters are paid well below minimum wage...$2 to $3 an hour, on the theory that tips make up the balance so the waiter is making at least minimum wage. Which is all the restaurant is required to do.
With regard to a pool of waiters/waitresses from one single restaurant (say an Olive Garden), the IRS will look at the gross receipts of the restaurant, apply the formula to see what the tips should be, look at the times the waiters/waitresses were working, and determine whether or not the income was under reported. If it was, they will assess the balance plus interest.
The same kind of approach could be done with escorts...just a little different. Look at your purchases during the year (car, homes, CC bills, checking accounts, etc.) as opposed to your reported income. Apply the formula necessary to determine what your income was required to be in order to make those purchases, and then assess the difference.
Let's be clear, the IRS prefers to assess, levy and get you on a payment plan. It takes egregious conduct on your part in order for the IRS to refer the case for criminal prosecution. Everyone hates these cases in the criminal context. So, you'll likely be placed on a payment plan. It used to be (I don't know the current IRS policy) that at the time you agreed to the payment plan, you could reduce your tax liability IF you stayed on the payment plan.