Under-Reporting Income

It’s important that your tax return accounts for all of the income you have for that year. But 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 others.

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 returns to the tax return you file.  If the IRS can’t match up these reports with what you reported on your return, it will send you a notice to ask about the difference.

Keeping track of information returns is helpful for knowing the income you should report (See What are my resources? 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.

Include all your income on your tax return.

Keep accurate and complete records.

Wait until you get all of your income statements before filing your tax return. Otherwise, you may have to file an amended return.

Check the records and informational returns 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.

Make sure you know what of your income 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. or life events such as foster care payments from a state. 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 Professional for tips before you select one. Low-income taxpayer clinics are available for individuals who qualify.
  • United States (U.S.) citizens and resident aliens generally also need to report income received from foreign sources.
  • Alternate sources of income can include virtual currencies 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 IRS 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 return.
  • Respond to the notice whether you agree or disagree with the notice; the form 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 will need to contact the business or person reporting the information. Ask them to correct it and provide the corrected information to the IRS.
  • If you believe the information reported in the notice is incorrect because someone else is using your name and/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 return unless you have other additional income, credits or expenses to report.

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 will charge interest until the balance is paid in full. However, if you can’t pay in full, there may be other options.

Again, do not delay your response, as interest, and perhaps penalties will continue to accrue until the balance is paid in full.

Some common information returns are:

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

Publication 525, Taxable and Nontaxable Income

Publication 531, Reporting Tip Income

Tax Topic 652 - Notice of Underreported Income - CP2000

Understanding your CP 2000 Notice

Tax Topic 400 - Tyes of Income

Small Business and Self Employed – What is Taxable & Nontaxable Income

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.

Have a different tax issue?  Browse common issues and situations at Get Help.

Is your tax problem more complex?  If your issue is causing you financial hardship, you have tried repeatedly and are not receiving a response from the IRS, or you feel your taxpayer rights are being violated, consider contacting TAS.

Do you feel that you need help from a tax professional but can’t afford one? You may be eligible for representation from an attorney, certified public accountant (CPA), or enrolled agent associated with a Low Income Taxpayer Clinic.

Last modified May 31, 2017