What’s Under Reporting?
Purposefully reporting less income or revenue than was received is underreporting. The main reason why businesses and individuals underreport their income is to try to minimize or avoid paying taxes on what they earn.
Underreporting is not a crime without a victim. The billions of dollars in lost tax revenue due to underreporting reduce the federal government’s reliance on these funds to fund Social Security, Medicare, and numerous other programs.
Gratitude Under Reporting
A financially troubled public business may declare significantly fewer sales for a fiscal quarter than it made at that time if there is a significant decline in its share price. This is only being done for the show. The plan is to conceal sales and then combine those statistics with the revenues in the financial statement for the next quarter, tricking observers into thinking that the business has recovered and is now in a much better position.
A company’s stock price may rise due to encouraging investors with the impression of a more successful quarter. This kind of underreporting is prohibited.
Not all of the offenders are companies that are listed on stock markets. People who register as self-employed or have cash income often underreport their income. Here, the main objective is to minimize tax obligations and retain a more significant portion of any earnings.
Because their employers or other third parties frequently record their earnings directly to the IRS, wage and salary workers typically do not underreport their incomes.
The Internal Revenue Service (IRS) estimated in the 1990s that up to 84% of cash tips—worth hundreds of millions of dollars annually—were not recorded. Furthermore, in 2019, the U.S. tax authorities disclosed that underreporting was responsible for about $352 billion of the $441 billion tax gap in the United States for the 2011–2013 tax years—the difference between taxes owed and taxes paid.
Between 2011 and 2013, underreporting was responsible for around 80% of the tax shortfall in the United States.
Repercussions of Not Reporting Enough
If discovered to have been underreported, individuals or businesses may be fined or, in the worst situations, even subject to criminal prosecution.
It’s crucial to keep in mind, however, that underreporting is only illegal if the offender knowingly violates the tax rules. Should this occur due to carelessness or computation mistakes, the IRS may fine the underreporting business or person without taking legal action against them.
For instance, a server would probably not face criminal charges if she were to pocket a few dollars one evening carelessly rather than combine them with the remainder of her tip. That waitress won’t face a criminal charge unless investigators find that deliberate tax evasion or fraud occurred.
Conclusion
- The intentional, illegal act of reporting less income or revenue than was received falls under under-reporting.
- Underreporting may eventually result in tax losses that reduce the money Social Security, Medicare, and other government programs must pay for out-of-pocket expenses.
- Both private individuals and publicly traded corporations may engage in underreporting.
- Individuals who intentionally falsify reports may be subject to fines, legal repercussions, or both.
