What Is Under Reporting?

Under reporting is a term describing the crime of intentionally reporting less income or revenue than was actually received. Companies and individuals chiefly under report their incomes in an effort to avoid or reduce their respective tax liabilities. Under reporting is not a victimless crime. In fact, the billions of dollars of tax loss revenue caused by under reporting reduces the funds with which the federal government relies on to finance Social Security, Medicare, and a host of other programs.

Key Takeaways

  • Under reporting refers to the deliberate criminal act of reporting less income or revenue than was actually received. 
  • Under reporting may be committed by public companies and by individuals alike. 
  • The tax loss revenue that results from under reporting may ultimately slash the funds that Social Security, Medicare, and other federal programs need to finance their outgoing expenditures.
  • Those who under report may face fiscal penalties, criminal consequences, or both.
  • Those who incorrectly report their income due to miscalculations may still contend with fines, but will not be charged with a crime.

Understanding Under Reporting

Often, if a struggling public company experiences a sharp drop in its share price, it will report even lower revenues for a fiscal quarter than it actually earned during that time period. This is done merely for optical purposes, because by hiding revenues, and then subsequently lumping those hidden figures with the revenues in the following quarter's earnings statement, it may seem to onlookers that the company has rebounded. The appearance of a more successful quarter can inspire investors, and ultimately boost a company's stock price. Naturally, this form of under reporting is also an illegal practice.

Under Reporting Statistics

In the United States, under reporting accounts for about $376 billion of the $450 billion tax gap, which is defined as the difference between taxes owed and taxes actually paid. Under reporting by individual tax filers accounts for approximately 52% of the tax gap. Self-employed filers and those who earn cash income are most likely to under report their incomes. For example, studies have shown that restaurant servers under report their cash tips by as much as 84%.

Consequences of Under Reporting

Individuals and companies that are caught under reporting may be subject to fiscal penalties, and in extreme cases, they may face criminal charges. But under reporting is only a crime if offenders willfully disregard the tax code. But if this action occurs due to negligence or calculation errors, the Internal Revenue Service might penalize the under reporting company or individual, but it will not initiate criminal action against those parties. For example, if a waitress one night distractedly back pockets a few bills, rather than consolidating them with the rest of her take, this act of negligence won't likely result in criminal punishment. But if investigators determine that willful tax evasion or fraud has occurred, then that waitress may be vulnerable to a felony conviction.

Wage and salary employees typically do not under report their incomes, because their earnings are usually directly reported to the IRS by third parties--namely, their employers.