Working "Off the Books": What to Avoid

David Lawrence Ganz

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Litigation Lawyer

Contributor Level 10

Posted almost 6 years ago. 17 helpful votes

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1

What is Public Awareness of This?

Welcome to the world of the multi-billion dollar underground economy. The IRS knows that it exists. Congress is aware of it. So is just about every American who ever asked if someone would lower the price of something if they were paid in cash

2

Drawbacks of Working "Off the Books"

Off the books sounds like a great deal until you examine the specifics. If you aren't being paid on the books, that means that: o You aren't getting credit within the social security system for the requisite number of quarters that you must have in order to receive full benefits at retirement. o If you fall and hurt yourself on the "job", there's no record -- and if it's your fault, worker's compensation isn't a likely remedy because you weren't working (no record of it). o There mere fact that you work 'off the books' doesn't mean that you don't have the legal obligation to pay taxes on your earnings. When the IRS catches you, the penalties for failing to report are yours. (The failure to withhold is a penalty that belongs to your employer).

3

Who Can Work "Off the Books"

Now the mere fact that tax is not withheld from your pay check, or that you are paid in cash, is not in and of itself, evidence of an intent to violate the law. There are some instances where certain types of salaries or wages are specifically excluded from "wages" for purposes of income tax withholding. a~z Newspaper carriers under the age of 18 who deliver to their customers, for example, are not required to have monies withheld either from the payment by their employer, or from the tips received from their customers. a~z Casual employment (less than $50 paid and less than 24 days worked in a particular quarter) requires no withholding. a~z Cash or non-cash tips of less than $20 a month requires no withholding under the law.

4

Unexpected Consequences

There is another totally different side of earning the income in this unique way which becomes apparent the first time that you are involved in an automobile accident and apply for no fault benefits. The insurance carrier inquires as to lost wages that you may have. They will only pay the lost wages that are actually declared -- not those that are off the books. a~z If you bring a personal injury claim of any kind and ask for damages for economic loss (loss of income), the income tax returns that you file are going to be the basis for the evidence that leads to recovery in this area. "Off the book" income simply never shows up in the first place-- and the consequence is that you don't get compensated for the loss when it occurs.

5

Trouble with the IRS

Internal Revenue Service agents have a variety of ways to catch the big fish in the "cash" situation. They can actually do a "net worth" prosecution, which is a criminal action that starts with a premise of what you had at a certain point in time, and then show what you have now. The difference is your income, that which tax wasn't paid on. Remember: Al Capone didn't spend time in jail for the bootlegging, murders, and mayhem that he is alleged to have caused; he spent the time because of an income tax charge that he simply didn't count on.

6

Solutions

If the amount of "off the book" income that you received in the past is minimal, there may be no need to refile a past return to correct it. But if the amounts are substantial, and if you have understated income by more than 25% of your gross income, then the IRS has no statute of limitations and can bring the case against you for it, for a period of six years. If you don't file a return at all, or if you file a false or fraudulent return, or there is a willful attempt to evade tax, the IRS can go against you on this at any time - there is no statute of limitations. Where fraud is involved, and proven, the Government is entitled to receive additional taxes over and above what was originally due.

Additional Resources

Internal Revenue Code of 1986 as amended

Internal REvenue Service

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