How do taxation authorities such as IRS control income tax returns by residents? In case a person has a taxable income for which he didn't pay the tax, how can it be discovered?

  • 1
    I may just be cynical, but it sounds like you have income that you're trying to hide and wonder how you'll be caught? – D Stanley Mar 6 at 14:32
  • @DStanley I'm interested in Game Theory and Mechanism Design. If there is no way to be caught not paying tax, any rational agent will not pay the tax. That's the tragedy of the commons. Governments need to think about designing proper tax control mechanisms. – medvedev1088 Mar 6 at 14:44

Most people have the bulk of their lawful income reported to the IRS by people/institutions and the information on the tax return is filed by the taxpayer is essentially just a double check.

If you have:

  • a job where the your employer withholds taxes
  • a job where you are an independent contractor and you make more than $600
  • a bank account where you make more than $10 in interest
  • a investment account where you withdrew funds, or were paid a dividend or had capital gains.
  • a retirement account where you withdrew funds
  • an HSA or 529 that you withdrew funds from.

Then your income from these sources will be reported to the IRS.

Some of your expenses are also reported to the IRS:

  • IRA/401K deposits
  • mortgage payments

Some things such as charity donations, and property tax payments aren't reported to the IRS.

In the time after the due date the IRS computers are matching your return against all the data they already have, or is included in the reporting of these other institutions.

  • 1
    holdings are not taxed, only interest income, so balances are not reported. – D Stanley Mar 6 at 14:31

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