The IRS gets information from third parties and matches this information to you through its computers. Stay one step ahead by being extra careful to report on your tax return what the IRS already knows about you. (You should receive from the third parties copies of all the information they send to the IRS.) What the IRS knows and how:
Your Income. The IRS knows, of course, if you have been paid over $600. The payer must report this payment to the IRS on Form 1099-MISC, Statement for Recipients of Miscellaneous Income. Included in this category:
Rent or royalty payments.
Prizes and awards that are not for services.
Payments made by medical and health-care insurers to a doctor or other supplier of medical services under and insurance program.
Attorney’s and accountant’s fees for professional services.
Witness or expert fees paid by a lawyer during a legal proceeding.
Payments made to entertainers for their services.
Your wages. The IRS knows from your W-2 Form exactly how much you earned in regular income, bonuses, vacation allowances, severance pay, moving-expense payments, and travel allowances. Your W-2 must be attached to your return.
Interest income. The IRS knows if you’ve been paid any interest. Banks and financial institutions must report these payments to the IRS on Form 1099-INT, Statement for Recipients of Interest Income. Trap: Some interest income is reported to the IRS even though you haven’t received it yet. It must be reported as part of your income.
Dividend income. The IRS knows if you’ve received over $10 in money, stock, capital-gain distributions, or property from a corporation. The corporation must report these payments to the IRS on Form 1099-DIV, Statement for Recipients of Dividends and Distribution. Important: Make sure the report agrees with your records.
Tax-refund income. The IRS knows about tax refunds you receive. State and local governments must report such payments of over $10 on Form 1099-G, Statement for Recipients of Certain Government Payments. Important exception: If you didn’t claim the state and local taxes that you paid as itemized deductions on your federal return, you don’t have to report these refunds as income. If you receive a Form 1099-G, analyze it carefully to see whether you must include it in income or if you qualify under this exception.
Gambling winnings. The IRS knows about money you won from horse racing, dog racing, jai alai, lotteries, raffles, drawings, Bingo, slot machines, and Keno. It’s all reported to the IRS on Form W-2G, Statement for Recipients of Certain Gambling Winnings. The general rule: Payments of $600 or more must be reported by the payer. Exceptions: Bingo payments of $1,200 or more and Keno payments of $1,500 or more will be reported.
Other income the IRS knows about:
Mortgage interest received from individuals in the course of a trade or business.
Money received from broker and barter exchanges.
Distributions from pension and profit-sharing plans, IRAs, etc.
Cash payments of over $10,000 received in a trade or business.
Cash deposits of over $10,000 made to your bank account.
Fringe benefits received from your company.
Social Security benefits.