Penalty for Failure to Report Income on Tax Return

The Internal Revenue Service expects you to to report the income you’ve earned and remit the corresponding taxes due to the government. Failure to report income on a tax return is an act of noncompliance and you could face civil and/or criminal penalties as a result.

Typically, your employer will report your earnings to the IRS and send you a W-2 form by January 31. If you worked as a contractor, you should get a 1099 form from the entity you performed services for. If the forms are missing, you can file your return by providing an acceptable estimate of your income and tax withholding for the year. If you report that you made less money than you did during the tax year and fail to file an amended tax return once you get the forms, you'll be underreporting income, which is noncompliance with the tax code.

If you neglect to report the correct income on your tax return and substantially understate your income tax, you likely will have to pay an accuracy-related penalty, equal to 20 percent of the underpayment. The IRS considers the understatement to be substantial if it exceeds 10 percent of the correct tax or $5,000, whichever is greater. However, if you show reasonable cause accompanied by good faith regarding the discrepancy, the IRS may choose not to impose the penalty.

Deliberately reporting less income or revenue than you actually received is illegal. If you go beyond an honest mistake and willfully abstain from reporting income, you will be regarded as having the intent to defraud the IRS, and hence the government. If you legally earned income but evade tax by either not reporting or under-reporting income, you may reduce your tax liability now but risk legal jeopardy later.

Even to the IRS and the courts, the line between negligence and fraud may not always be black and white. Not reporting income may invite an audit. Negligence or a careless mistake on your tax return can attract a 20 percent penalty on your tax bill, but tax fraud results in a civil penalty of up to 75 percent. If the IRS determines your case is serious and decide to pursue criminal charges, you could face a $250,000 fine and up to five years in prison.