Under Reporting

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 incomings 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 the federal government relies on to finance Social Security, Medicare, and a host of other programs.

Key Takeaways

  • Under reporting is the deliberate criminal act of reporting less income or revenue than was actually received.  
  • 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.
  • Under reporting may be committed by public companies and by individuals alike.
  • Those who purposely under report may face fiscal penalties, criminal consequences, or both.

Understanding Under Reporting

If a struggling public company experiences a sharp drop in its share price, it may report even lower revenues for a fiscal quarter than it actually earned during that time period. This is done merely for optical purposes. The trick is to hide revenues and then subsequently lump those hidden figures with the revenues in the following quarter's earnings statement, so that onlookers are led to believe that the company has rebounded and is now in much better shape.

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.

Companies listed on stock exchanges aren't the only culprits. In fact, in most cases, it's usually self-employed filers and those who earn cash income that are most likely to under report their incomes. The primary goal here is to reduce tax liabilities and pocket a higher percentage of any money made.

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.

During the 1990s, the Internal Revenue Service (IRS) estimated that as much as 84% of cash tips, worth hundreds of millions of dollars each year, were going unreported. And in 2019, the U.S. tax authority revealed that under reporting accounted for about $352 billion of the United States' $441 billion tax gap—the difference between taxes owed and taxes actually paid—in the 2011-2013 tax years.

Under reporting accounted for approximately 80% of the U.S. tax gap in the 2011-2013 tax years.

Consequences of Under Reporting

Individuals and companies that are caught under reporting may be subject to fiscal penalties, and in extreme cases, might even face criminal charges.

However, it's important to remember that under reporting is only a crime if offenders willfully disregard the tax code. If this action occurs due to negligence or calculation errors, the IRS could penalize the under reporting company or individual without initiating 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. Only if investigators determine that willful tax evasion or fraud has occurred will that waitress be at risk of a felony conviction.

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