IRS audit
 

Unreported income

If the IRS claims that you have unreported income, the IRS will mail out a notice to you in an attempt to collect taxes on the unreported income. Unreported income could set the IRS audit red flags off. There are a few ways unreported income can occur. Firstly, the IRS used a process called the Automated Underreporter program or AUR. Using this AUR program, the IRS searches all files under your social security number.  The AUR program then compares all the tax returns information. When there is a mis match of income reported, the IRS will mail out a letter. Another way the IRS can come across unreported income is by evidence of criminal activity or leads.

Evidence of criminal activity 

The IRS continually receives evidence of criminal activity from a variety of sources. These evidence of criminal activity often lead to unreported income. The sources of evidence of criminal activity and unreported income include federal, state, and local law enforcement agencies. 

IRS audit leads

The IRS often develop IRS audit leads simply from reading the newspaper. The IRS knows that many criminal activities will undoubtedly involve unreported income.

Example of unreported income

An example of unreported income is as follows:

If a newspaper reports that Jay Manual who resides at 147 East Ocean Street was caught late last night with 2 ounces of cocaine in his car, the IRS may conclude that Jay Manual was selling cocaine and probably not reporting the income on his tax return.

While the IRS has no way of knowing whether this is indeed true, the IRS will certainly want to investigate and the IRS does this by an IRS audit.