What is Under Reporting

Under reporting is the deliberate act of reporting less income or revenue than was actually received, usually for income tax purposes. Under reporting income in order to avoid taxes is an illegal practice.

When people underreport their incomes, the federal government loses tax revenue that could go toward social security, Medicare and other federal projects. Corporations are especially watched by auditors because of the large tax bills at stake each tax year.

BREAKING DOWN Under Reporting

Another element of under reporting sometimes applies to public companies reporting lower revenues in a fiscal quarter than were actually recorded. If the company has already been reporting bad news and the stock is down, executives may try to take some revenue from the current quarter and push it into the next quarter. This way, the bad news can be "flushed out," and the company can report an upside surprise in the coming quarter, potentially boosting the stock price. This practice is also illegal.

Under Reporting Statistics

In the United States, under-reporting accounts for more than $376 billion of the $450 billion tax gap, or the difference between taxes owed and tax payments actually received. Under-reporting by individual tax filers accounts for about 52 percent of the tax gap. Wage and salary workers are least likely to under-report their incomes on tax returns, but self-employed filers and those who earn cash income are most likely to under-report income on their tax returns. Restaurant servers, for example, have been found to under-report their cash tip earnings by as much as 84 percent.

Consequences of Under Reporting

If caught under reporting, individuals and companies will be subject to penalties and, in extreme cases, criminal charges. However, if it can be shown that the under-reporting was the result of negligence, rather than a willful disregard of the tax code, then the IRS might penalize the under-reporting company or individual, but will not initiate criminal proceedings. For example, if a waitress fails to report her cash tips because she was genuinely unaware that this income needed to be reported, then this is considered negligence and will most likely not incur criminal punishment. However, if investigators find that tax evasion or fraud has occurred, the waitress may be convicted of a felony.