But if someone's selling drugs, wouldn't reporting the income create a paper trail that could get them arrested? I thought there was some law that protected people from having to incriminate themselves on tax forms?

You're thinking of the Fifth Amendment protection against self-incrimination. It's a complex legal area where tax law and constitutional rights intersect. While the Fifth Amendment can protect you from having to provide incriminating information, courts have generally held that it doesn't excuse individuals from filing tax returns or reporting income. The requirement to file and pay taxes applies to everyone. However, the specific way information is reported can sometimes be handled to minimize self-incrimination. This is precisely why someone in this situation should work with both a tax attorney and criminal defense attorney - not just a regular tax preparer. It requires specialized legal knowledge to navigate properly.

There's no specific line for "illegal income" on IRS forms. All income, regardless of source, gets reported in the appropriate categories based on how it was earned (business income, capital gains, etc.). The IRS is concerned with whether income is taxable, not whether it's legal.

That's actually brilliant! I'm still in touch with my old manager and the company is still around. Do you think the W-2 alone would be enough proof for the state audit, or do they specifically need to see the actual tax return?

The W-2 might be enough depending on what exactly the state is questioning. Since they claim you paid $0 in state taxes, the W-2 would directly contradict that by showing your withholding amounts. It's solid evidence of taxes being taken from your paychecks. For a complete defense, ideally you'd want both the W-2 and the tax return transcript. The W-2 proves what was withheld, while the return shows what you actually filed and calculated. Together they tell the complete story and leave the state little room to argue.

This is good advice. I work for a CPA firm and we always recommend sending what's called a "partial response" before the deadline if you can't get everything together. Document your efforts to comply - keep records of all calls, submission dates of forms, etc. Many state tax authorities will grant reasonable extensions if you're making good faith efforts.

Wow, that's a great idea! So I could just have my company job take out extra from each paycheck instead of doing the quarterly thing? Would I need to tell them it's for side income or just put down a higher withholding amount?

You don't need to explain why you're changing your withholding - just submit a new W-4 with the adjusted amount. On the current W-4 form, there's a section specifically for "extra withholding" where you can put a dollar amount to withhold from each paycheck. I used the withholding calculator, which asked for info about both my W-2 job and estimated side income, then it told me exactly what to put on each line of the W-4. Just make sure you're setting aside enough to cover both income tax and self-employment tax (the SE tax is the one that catches most people by surprise).

Oh crap, I didn't even think about state taxes. Do you know if the thresholds are different? My side gig only makes like $900 a month.

Thanks for this! I've been tracking expenses but didn't think about mileage. Is there a specific app you recommend for tracking business miles? And for the home office deduction, does it matter if I'm sometimes using my dining room table vs having a dedicated office space?

I use MileIQ for tracking business miles - super simple and it creates reports you can use for taxes. Some people like Everlance too. For the home office deduction, you unfortunately need a space used exclusively for business. The dining room table wouldn't qualify since it's also used for personal purposes. It needs to be a dedicated area used only for your business. If you have a spare bedroom or even a section of a room that's exclusively for your wedding planning business, that could qualify. The IRS is pretty strict about the "exclusive use" requirement.

This is exactly what I do! So much simpler than doing estimated payments. My accountant suggested withholding an extra $200 per paycheck to cover my side gig, and I've never had issues or penalties.

Absolutely! It's been working for me for 3 years now with zero issues. The key is calculating the right additional withholding amount. I worked backwards by estimating my annual business profit, calculating roughly 15.3% for self-employment tax plus my income tax rate (22% bracket), then dividing by my number of paychecks. The peace of mind from not dealing with quarterly payments is totally worth it. And technically, you're also avoiding potential underpayment penalties since the IRS treats withholding as happening evenly throughout the year, even if you increase it later in the year.

That's a really good idea! I do remember paying online through my bank for some quarterly estimated payments too. Would showing the bank statements be enough though? I'm worried they'll say I need the actual tax forms.

Bank statements are considered strong supporting evidence, especially for proving payments were made. While they may not replace the actual return completely, they directly contradict the claim that you paid zero taxes. Include a brief letter explaining your situation and that you're providing the best documentation available to you. Most state auditors are reasonable when presented with clear evidence of compliance. The key is showing you're making an honest effort to resolve the issue. If possible, combine these bank statements with your W-2 from that year and any IRS transcript you can obtain. Together, these paint a clear picture of your tax situation.

I had to deal with this exact situation. What worked for me was getting wage transcripts from the IRS (shows all your income reported on W-2s and 1099s), bank statements showing tax payments, and any other financial records from that year. Put it all together with a letter explaining the situation. In my case, the state tax auditor was actually pretty understanding once I showed I had legitimate documentation, even if it wasn't the exact original return. The key was being proactive and not ignoring their requests.