All income that taxpayers earn needs to be reported to the IRS so that they can pay the appropriate amount in taxes. For many people, this is as simple as reporting the income they earn from biweekly paychecks. They only have one source of income, so as long as they report their full earnings, they are paying the IRS the necessary amount.
However, the IRS is often wary of what it calls the “underground economy.” This term refers to other ways of making money that often go unreported, meaning that people are not paying the necessary taxes. This doesn’t mean that they haven’t paid any taxes at all. Many aspects of the underground economy are side jobs that people have in addition to their main employment.
Potential examples
Some examples of the underground economy include:
- Making money at a garage sale
- Babysitting or providing nanny services
- Performing yardwork, such as cutting grass or trimming trees
- Offering tutoring services to neighborhood students
- Failing to report tips that are earned while waiting tables, parking cars or engaging in other activities where tips are common
Someone may have a 9-to-5 job delivering packages, and they report all of that income. But on the weekends, they provide other services, such as doing neighborhood yardwork or babysitting, and they assume that that income doesn’t count. But from the IRS‘s perspective, it absolutely counts and needs to be reported.
Failing to report all income can lead to conflict with the IRS and may trigger an audit, so it’s important for those in this position to understand what legal options they have.