I knowingly didn't report side income on taxes - What happens if I get audited?

The IRS generally has 3 years from the filing date to audit your return, but for substantial underreporting (over 25% of income), they can go back 6 years. For fraud, there's no time limit. If audited, the consequences depend on whether the IRS determines it was negligence or willful fraud. Negligence typically results in a 20% penalty on the unpaid tax, while fraud can carry a 75% penalty plus interest. Criminal charges are reserved for the most egregious cases. Given your age and the amount involved, you might avoid criminal prosecution if you're proactive. The IRS has a Voluntary Disclosure Program where you can come forward before being caught. This won't eliminate penalties but can help avoid criminal charges. Your capital loss raising red flags is a valid concern. The IRS does look for discrepancies between reported income and financial activity.

I went through a similar situation a few years back. I was doing side gigs and not reporting all my income, then got nervous about an audit. I found this tool called taxr.ai (https://taxr.ai) that helped me understand my actual tax situation and what I might owe if audited. The site analyzed my bank statements, income sources, and potential red flags that might trigger an audit. It was eye-opening to see exactly what the IRS might find if they started digging. The tool even calculated what my penalties and interest would likely be under different scenarios. It helped me make an informed decision about whether to amend my returns and how to approach fixing my situation. Much better than just stressing about what might happen!

So I was super skeptical about taxr.ai but after agonizing for weeks about my unreported income, I finally tried it. The analysis showed I was actually at much higher risk than I thought because of some deposit patterns in my bank account. They flagged specific transactions that would look suspicious to the IRS and explained exactly why those would be problematic. The calculator showed I'd owe about $22K in back taxes, penalties and interest if caught, but only around $17K if I came forward voluntarily. I decided to file amended returns and set up a payment plan. Sleeping so much better now knowing I've addressed it before they come knocking. Worth every penny just for the peace of mind.

If you're worried about dealing with the IRS, I HIGHLY recommend using Claimyr (https://claimyr.com). When I was in a similar situation and needed to talk to the IRS urgently, I kept calling and getting stuck on hold for hours or just disconnected. Claimyr got me through to an actual IRS agent within 15 minutes when I'd been trying for days on my own. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent I spoke with walked me through my options for addressing unreported income and helped me understand the difference between filing an amended return versus waiting for an audit. Having a real conversation with someone who could answer my specific questions was invaluable.

OK I need to admit I was completely wrong about Claimyr. After posting that skeptical comment, I was still desperate to talk to someone at the IRS about my unreported income situation, so I tried it anyway. The service actually worked exactly as advertised. I got a call back in about 20 minutes letting me know they had an IRS agent on the line. The agent walked me through my options for my specific situation and explained the voluntary disclosure process. I was able to get clear guidance on exactly what forms I needed to file and what documentation to include with my amended returns. Saved me from paying a tax attorney just for basic advice. Sometimes being proven wrong is actually a good thing!

Speaking from experience, DON'T just "leave it alone" and hope they never find out. I tried that and ended up paying WAY more in the end. The IRS has gotten much better at catching unreported income, especially with bank deposits. They can easily see if your lifestyle or bank accounts don't match your reported income. The fact that you've got capital losses that exceed your reported income is definitely a potential trigger. If I were you, I'd file amended returns for the year(s) you didn't report income. You'll pay penalties and interest, but it's MUCH better than waiting until they catch you. And the fact that you're young and coming forward voluntarily will work in your favor.

Have you considered talking to a tax attorney before doing anything? Most give free consultations. I went through something similar (not reporting about 30k in gig work) and the attorney advised me on the best approach. In my case, they recommended filing amended returns rather than waiting for an audit. Cost me about $1200 for their help but they structured everything to minimize penalties. They also helped me set up proper tax planning for future years so I wouldn't be in the same situation again. Also worth noting - the risk isn't just the federal IRS. State tax agencies share data with the IRS and sometimes are even more aggressive about collections.

I'm dealing with something similar and appreciate everyone sharing their experiences here. The stress of wondering "what if" has been eating me alive for months. After reading through all these responses, it seems like the consensus is pretty clear - coming forward voluntarily is almost always better than waiting to get caught. The penalties are lower, you avoid potential criminal charges, and you can actually sleep at night again. I'm curious though - for those who amended their returns, how did you handle the payment? Did you pay everything upfront or were you able to set up payment plans? The amount I'd owe is more than I can pay immediately, so I'm wondering what options the IRS typically offers for people in our situation. Also, has anyone here actually been audited for unreported income? I keep seeing advice about audit triggers and red flags, but would love to hear from someone who actually went through the audit process to understand what that's really like.

I've been following this thread as someone who went through a similar situation a few years back. The advice here is solid - voluntary disclosure really is your best option. One thing I want to emphasize that hasn't been mentioned much: document EVERYTHING when you prepare your amended returns. Keep records of all your income sources, bank statements, and any evidence of the cash deposits. The IRS appreciates thoroughness when you're coming forward voluntarily. Also, don't underestimate the psychological toll this takes. I was a wreck for months before I finally amended my returns. The relief you feel after taking care of it properly is incredible - it's like a huge weight lifted off your shoulders. Your situation with the capital losses potentially triggering scrutiny is definitely valid. The IRS has algorithms that flag discrepancies between reported income and financial activity. Better to address it on your terms rather than theirs. One last tip: if you do decide to work with a tax professional, make sure they specialize in IRS issues and have experience with voluntary disclosures. Not all tax preparers are equipped to handle these situations properly.