Understanding the John Doe Summons: How the IRS Tracks Unreported Income
- chimeinconsults2
- Dec 29, 2024
- 3 min read
The IRS has tools to ensure people pay their taxes, even if they try to hide their income. One of these tools is the John Doe summons—a way for the IRS to find out who hasn’t reported their earnings. Let’s break it down so it’s easy to understand.
What Is a John Doe Summons?
Imagine the IRS wants to know if a group of people has been skipping taxes, but they don’t know anyone’s name. A John Doe summons lets them ask banks, payment apps, or companies for records to find out who’s making money but not reporting it.
This tool comes from Section 7609(f) of the Internal Revenue Code. To use it, the IRS has to show:
A Specific Purpose: They’re investigating a particular group of taxpayers.
A Reasonable Basis: They believe these taxpayers may not be following tax laws.
Narrow Focus: They’re only asking for information they need to investigate.
Court Approval: A judge must approve the summons before it’s issued.
Why Should Gig Workers Pay Attention?
If you work in the gig economy—driving for Uber, delivering for DoorDash, renting out property on Airbnb, or freelancing—you might get a 1099 form at tax time. This form tells the IRS how much money you made. Even if you don’t get a 1099, you still need to report any cash or side income you earned.
Some people think they can skip filing taxes if they’re paid in cash or through apps. But companies and payment processors like PayPal or Venmo often report your earnings to the IRS. If they don’t, the IRS can use a John Doe summons to get the information.
How Does the IRS Find Out?
The IRS uses a system to match the income reported by companies with what you report on your tax return. If you leave something out, the system flags it. With a John Doe summons, they can dig deeper and find out about hidden income.
For example, in 2021, the IRS issued a John Doe summons to PayPal and Venmo to identify users with significant transactions who might not have reported their earnings. This helped uncover taxpayers who earned money but failed to file or report all their income.
Why It’s Important to File Correctly
Failing to report all your income can lead to big problems, like penalties, interest, or even audits. For gig workers, this means:
Waiting for Your 1099: Don’t file your taxes until you’ve received all your 1099 forms. These forms show the IRS what you earned.
Reporting All Income: Even if you don’t get a 1099, you must report cash and other payments.
Avoiding Red Flags: The IRS is always looking for mismatches between what they know you earned and what you report.
What Should You Do?
Be honest and file your taxes correctly. If you’re not sure how to report your gig income, ask a tax professional for help. They can show you how to include expenses you’ve paid for work, like gas or supplies, which might lower your taxes.
The IRS has ways to find unreported income, and the John Doe summons is just one of them. If you’re working in the gig economy, make sure you’re filing your taxes the right way.
Have questions or need help getting started with filing your gig income? Schedule a session now for personalized assistance. Book your consultation today or call 800-527-8020 to speak with an advisor.
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