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Failing To Report Side Income Can Be Prosecuted As Tax Evasion

There is a big difference between iffy tax deductions and failing to tell the IRS about thousands of dollars in income. The shift toward a gig economy – piecing together income from multiple sources – means more people are earning “off-book” money that the government doesn’t know about.

So-called “side hustles” are costing the U.S. Treasury an estimated $216 billion in revenue, according to a recent study. But if the IRS catches on, those citizens may find themselves on the hook for back taxes and steep penalties – and possibly facing federal prosecution for tax evasion.

Undeclared income is a growing problem for the IRS

A survey by revealed that about 1 in 4 Americans earn some money on the side that is not declared to Uncle Sam. The Millennial generation is the most likely to pocket off-book income – an estimated 33 percent of Millenials are holding back some of their earnings from the IRS. By comparison, the survey showed that about 26 percent of Generation X’ers and about 16 percent of Baby Boomers have unreported income streams. And it’s not necessarily people who are “scraping by.” The survey found that high earners were the most likely to have unreported side income – more than one-third of those in the $150,000 to $300,000 bracket.

The most common side hustles are freelance creative work, babysitting and house cleaning. Other popular gigs include passenger and delivery driving, manual labor projects, dog walking, and freelance consulting such as legal or financial advice. The average side hustle brings in about $3,000 in tax-free money. That is more than enough to bring down the wrath of the IRS.

Three reasons that underreporting income is a bad idea

  1. Undeclared income means less tax revenue for the government. They will raise other taxes to make up the difference.
  2. Social Security is based on the declared earnings you paid in. At retirement, your benefit checks will be much lower.
  3. Failing to disclose income is tax evasion, punishable by prison and/or thousands of dollars in IRS penalties and interest (plus the back taxes).

What the IRS doesn’t know can’t hurt me, right?

Failing to disclose side hustle income is a big gamble. The IRS comes down hard on tax cheaters. Anyone suspected of defrauding the IRS can expect a full audit of current and previous tax returns. They will likely be assessed steep fines and penalties. They will get little leeway or leniency in repayment negotiations. The IRS may initiate bank levies or civil asset forfeiture. And if the fraud is egregious enough, offenders may be criminally prosecuted for tax evasion.

The IRS might not discover undeclared income on its own. But if someone turns you in – an ex-spouse, a scorned lover, a pious sibling, a disgruntled co-worker – the jig is up. In addition to the legal and financial trouble you would face, the whistleblower could be eligible for a reward from the IRS of up to 15 percent of your delinquent taxes.