If a unreported, self-employment check is cashed at one's own bank, is there a significant risk of tax evasion?I have a friend who is earning money through teaching music lessons. Each month, she earns about $700 in the form of personal checks. She has been cashing these checks at her own bank and has the notion that as long as she does not report the income, she will in this way safely avoid having to pay taxes on this... | |
Your friend does not realize that, should the IRS request bank statements form the bank (and they can) - the bank-produced statements will show not only checks deposited but also checks cashed. So her hidden income will be no longer hidden. If she truly wants to hide income, she might consider receiving compensation in cash or cashing the checks outside of her regular bank.
But I would not. Following my suggestions or continuing what she is doing now constitutes tax evasion, as you correctly termed it. This is actually a criminal offense, rewarded potentially by up to $100,000 fine or up to 5 years behind the bars. If you think that the IRS is not going to bother with criminal prosecution of a barely-making-ends-meet music teacher, you're probably right. They do have bigger fish to fry. However, why even risk something that has a potential of earning you a criminal record? Even if they let her off the hook, the mere existence of a criminal record can close a lot of doors for her.
And the amount of taxes she has to pay on this $8,400 annual income is not that huge, really. Especially if she carefully tracks her business-related expenses such as supplies, driving, and marketing.
Michael Plaks, EA, Houston TX
MichaelPlaks.com
nope
she might think she can get away with it but that is not the case, more than one self employed person has been caught and ends up with a huge tax bill
she needs to be forthright about it and claim her income on Sch C and SE like anyone else
