What Is Under Reporting?
Under reporting refers to the intentional act of declaring less income or revenue than was actually received to evade or reduce tax liabilities. Commonly practiced by both businesses and individuals, this deceit involves concealing earnings with the intent to minimize tax dues.
This fraudulent behavior has far-reaching consequences, including diminished government funds, which impacts the financing of crucial programs like Social Security and Medicare.
Key Takeaways
- Intentional Crime: Under reporting is the conscious and illegal practice of not declaring the true amount of income or revenue.
- Economic Impact: This act reduces tax revenue, which may subsequently affect the funding of Social Security, Medicare, and other federal programs.
- Widespread Occurrence: Both public companies and individuals can be culprits of under reporting.
- Severe Penalties: Perpetrators face severe penalties, from fines to potential incarceration.
Consequences of Under Reporting
Public Companies
When public companies engage in under reporting to manipulate stock prices, they often report lower revenues in one quarter to appear more robust in the subsequent quarter. This illegal act can mislead investors into purchasing shares based on false pretenses, leading to inflated stock prices.
Individual Cases
Typically, self-employed individuals or those earning cash income are most prone to under reporting. Their income is not as closely monitored by the IRS compared to wage and salary employees, whose incomes are reported by employers directly.
In the 1990s, the IRS estimated that 84% of cash tips, amounting to hundreds of millions of dollars annually, went unreported. By 2019, this issue continued to contribute significantly to the tax gap, with under reporting accounting for about $352 billion of the $441 billion difference between taxes owed and paid during the tax years 2011-2013.
Understanding Under Reporting
Under reporting holds severe repercussions. When businesses and individuals fail to accurately report their incomes, it deprives the government of essential funds, hampering the ability to support key public services.
Institutions caught engaging in under reporting face monetary penalties and potentially criminal charges, depending on whether the actions were deliberate or mistaken. Negligence may result in fines, while deliberate evasion can lead to felony convictions.
Example Scenario
Consider a scenario where a waitress forgets to include some cash tips in her overall reported earnings one busy evening. This form of oversight would likely result in a penalty rather than criminal charges. However, if there’s substantive evidence suggesting deliberate tax evasion or fraud, legal repercussions could be far more severe.
Those caught under reporting taxes deliberately may face significant fines, criminal charges, or both, highlighting the importance of maintaining transparency and accuracy in financial reporting.
Related Terms: tax evasion, income, revenue, tax code, IRS.
