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For employers in California, failing to report income that was earned under the table could result in serious penalties. Some employers may believe that since income was earned in cash or in a form that cannot be readily tracked that would exempt them from paying taxes, it does not. If you are an employer in California and want to learn about the tax implications of under the table income, you should consult with an experienced Roseville tax return planning lawyer. The NewPoint Law Group is dedicated to providing customers with the legal representation they need to manage their tax liability. Our firm is here to explain whether employers in California have to report under the table income on taxes.

Tax Evasion and Underreported Income

Any income that an employer earns must be reported to the Internal Revenue Service (IRS). This rule even qualifies for income that is earned under the table. Under the table income is typically income that a business receives that is not collected or recorded through the regular channels that a business would utilize to collect payment from a client. For example, if a business normally accepts checks as the form of payment for services rendered, if a client pays in cash instead, it is still necessary to record that income.

The California Employment Development Department (EDD) refers to businesses that engage in the underreporting of income as part of the “underground economy.” The underground economy is a section of people and businesses that try to circumvent tax reporting laws by utilizing a large number of cash dealings and similar deceptive tactics to control their tax liability.

California’s Franchise Tax Board (FTB) and the IRS have a substantial interest in preventing employers and workers from underreporting income. The primary reason for cracking down on tax evaders is to ensure that the tax gap does not continue to increase. The IRS defines the tax gap as the difference between a taxpayer’s actual tax liability and the amount of taxes that are paid in a timely fashion.

The tax gap is not only the result of the underreporting of income but also affected by taxpayers who do not file their income taxes and taxpayers that underpay their taxes. When companies engage in the underground economy, they often have a significant impact on the following tax-related matters:

  • Insurance
  • Payroll taxes
  • Employee benefits
  • Safety regulations for employees
  • Free market competition

It is also important to note that employers that pay their employees under the table to avoid tax laws place the business and its employers at risk. Whether employees are paid in cash or checks, an employer must still handle employment taxes. For example, if an employer does not withhold federal income taxes and FICA taxes from an employee’s pay, the IRS could impose serious tax penalties.

To learn more about underreporting income and the possible tax penalties for this offense, you should continue reading and speak with a Califonia tax attorney.

Penalties for Failure to Report Income

Several tax penalties could be imposed for failing to report under the table income. One possibility is an employer being investigated by the IRS’ Criminal Investigation Division. If the IRS investigation uncovers that an employer has been using deceptive accounting practices to hide income, the IRS could turn over the employer to the Department of Justice to be prosecuted.

Employers that are caught violating income tax reporting laws are convicted at a high rate of about 75%. If an employer is convicted for underreporting income, they can serve up to two years in prison. The criminal penalties could be increased depending on the extent of the underreporting, meaning an offender can serve several years in prison.

A practically guaranteed penalty is that the employer will have to pay fines and restitution for their crimes. Before this happens, the IRS may attempt to collect on the money owed by the taxpayer. This could mean that an IRS tax lien will be placed on property and assets owned by the company. If the tax bill is not paid, the IRS may institute proceedings to levy the employer’s property.

If you have underreported income, it is important to get ahead of the situation before the IRS begins an investigation. The IRS could be open to an arrangement that permits you to pay off your taxes to avoid criminal prosecution.

Work with Our Trusted California Tax Attorneys Today

If you need assistance managing your tax liability for under the table income, you should consult with an experienced California federal income tax attorney. The legal team at the NewPoint Law Group possesses decades of legal experience, and we would be proud to utilize this experience to represent you. Our firm understands the difficulty of running a business and maintaining compliance with various tax laws, and we are here to streamline the process. To schedule a confidential legal consultation to discuss your tax liability, contact the NewPoint Law Group at 1-800 358-0305, or contact us online.