Published: December 23, 2021 | Last Updated: November 4, 2024

Underreported Income

Overview

It’s important that your tax return accounts for all the income you have for that year. Remember, income isn’t necessarily just the money you make from your job — it’s also things like freelance income, interest, dividends, settlements, sale of property, and many other sources – See Gig Economy Tax Center.

Actions

What do I need to know?

The IRS has a variety of ways to verify the income taxpayers report on their returns. Most businesses and organizations are required to file “information returns” with the IRS, — IRS Forms W-2, IRS Forms 1099, and others — when they “pay” you. The IRS matches the information on these information returns to your tax return. If they do not match, you will get a notice asking about the difference.

Keeping track of information returns is helpful for knowing the income you should report (See the Resources, section for a list of common information returns).

There are other kinds of income, like tips or cash income, that may be taxable, but don’t require an informational return to be filed. In those cases, it’s your responsibility to track and accurately report the income.

What income should I include on my tax return?

Include all your income on your tax return.

Keep accurate and complete records of your income throughout the year as you earn it.

Some common information returns are:

Form W-2, used to report wages paid to, and taxes withheld from, employees
Form 1099-MISC, used to report amounts paid for services performed by independent contractors, rents, royalties, awards, and other payments
Form 1099-INT, used to report interest paid
Form 1099-DIV, used to report dividends paid
Form 1099-R, used to report distributions from retirement accounts
Form 1099-K, used by payment settlement entities, such as PayPal, to report payments via third parties
Form 1099-S, used to report the proceeds from the sale or exchange of real estate
Form 1099-B, used to report the proceeds from the sale of securities
Form 1099-C, used to report income from the forgiveness of debt

Wait until you get all your income statements before you file

Otherwise, you may have to file an amended return.

Check the records and informational returns

That you get from your employer, mortgage company, bank, or other sources of income (IRS Forms W-2, 1098, 1099, etc.) to make sure they’re correct.

What should I do?

Make sure you know what income you earned is taxable and what is not

Your tax liability may be affected by your occupation. For example: If you’re a member of the military, clergy, etc. Other income such as fees for services, foster care payments, or Medicaid Waiver Payments from a state may also affect your tax liability. If you have questions about the taxability of your income, ask the IRS or consult a tax professional. Visit our page on Choosing a Tax Return Preparer for tips before you select one. Low Income Taxpayer Clinics are available for qualified individuals.
United States (U.S.) citizens and resident aliens generally also need to report income received from foreign sources.
Alternate sources of income can include digital assets and amounts from bartering transactions.
If you receive tips, you’ll also have to report these as income.

A complete list of taxable and non-taxable income is available in Publication 525, Taxable and Non-Taxable Income.

If the IRS finds a discrepancy

If you receive a notice that your tax return doesn’t match the income or payment information the IRS has on file, you should:

Read your notice carefully — it explains the information the IRS received and how it affects your tax return.
Respond to the notice whether you agree or disagree; the notice explains what actions you can take. The notice should come with a response form, or other instructions on how to respond.
If the information is wrong, you’ll need to contact the business or person reporting the information. Ask them to correct it and provide the corrected information to the IRS. If the payer won’t correct the document, include an explanation as to why the payer’s information is incorrect.
If you believe the information reported in the notice is incorrect because someone else is using your name or Social Security number, call the IRS right away. See Identity Theft for information on what to do and how to report this issue.
If the information displayed in the notice is correct, you don’t need to amend your tax return unless you have other additional income, credits or expenses to report.

How will this affect me?

If you receive a notice that your income was underreported or overreported, it could affect your tax return. It may cause an increase or decrease in your tax liability or may not change it at all.

If your tax liability increases and you now owe money, it is to your benefit to pay the balance as soon as possible, because the IRS charges interest until you pay the balance in full. However, if you can’t pay in full, there may be other options.

Again, don’t delay your response, as interest, and perhaps penalties will continue to accrue until you pay the balance in full.

Wait, I still need help.

The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers and protects taxpayers’ rights. We can offer you help if your tax problem is causing a financial difficulty, you’ve tried and been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure just isn’t working as it should. If you qualify for our assistance, which is always free, we will do everything possible to help you.

Visit www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

Low Income Taxpayer Clinics (LITCs) are independent from the IRS and TAS. LITCs represent individuals whose income is below a certain level and who need to resolve tax problems with the IRS. LITCs can represent taxpayers in audits, appeals, and tax collection disputes before the IRS and in court. In addition, LITCs can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. For more information or to find an LITC near you, see the LITC page on the TAS website or Publication 4134, Low Income Taxpayer Clinic List.

Instead of just a notice that says I have a discrepancy in income reported, I received a notice that says I’m under audit. If you get a notice that your federal tax return is being audited, see Audits by Mail or Audits in Person for more information on what to do.