With the new threshold for receiving a 1099-NEC form being $2000, I'm wondering what's stopping someone from just not reporting that income if they don't meet that amount (besides morality, I suppose).
That's a big leap from the previous $600 limit, and I can think of a few scenarios where someone might have been over the previous threshold, but not the new one. And if the company never sends the IRS a 1099-NEC reporting that payment, and they also never send the non-employee one, then I guess I'm not really understanding how the IRS would know you were paid that money.
I understand that all income must be reported. I'm not suggesting someone should commit tax fraud. I'm just curious if this is really as much of an honor system as it seems like.
What's stopping someone from not reporting income that is under the threshold for receiving a 1099-NEC?
byu/Glad-Tower-2310 intax
Posted by Glad-Tower-2310
7 Comments
If you get audited, you have to account for your income using your books and records. For example, your bank records or your level of consumption might show you have unreported income. Because audits are rare, it’s *mostly* an honor system. Our current system would not work without most people complying voluntarily.
This has always been the case, but because the reporting thresholds are not automatically adjusted for inflation, more and more payers have been required to file information returns like Form 1099-NEC.
I’ve also gotten a $4 1099-NEC. That threshold is where they are required to issue the 1099. They can issue it for any value. A lot of CPA firms will only allow expenses to be deducted for the business where a 1099 was issued. So it becomes the difference of who pays taxes on the money.
It’s like wearing your seat belt (in states where it’s required by law). You’re probably not going to get caught for just that, but if you’re pulled over for something else, it’ll be added to your other charges. Same for this. If the IRS audits you and pulls your bank records, they’ll look to trace every income item to your tax returns and assess additional tax and penalties on the unreported income.
Another consequence of not reporting income is that it leaves your return open to audit/inspection forever. There is no 3-year statute if the IRS can prove fraud.
Many parts of our tax code rely on the honor system, with the threat of audit to keep people honest.
https://thefinancebuff.com/paying-taxes-book-catch.html
Honor system
The law is stopping them. If they want to violate the law and risk the adverse consequences, they can. That’s the same as it’s always been.
Yes it very much is an honor system. The IRS doesn’t have resources to follow up every big anomaly, and things like cash are completely invisible. They try to go after offenders they expect to get significant revenue from.