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Why Does IRS Want to Look into Your Bank Account?
Personal checking accounts are private individual accounts people use to hold money received. It’s not an account typically investigated or monitored by the Internal Revenue Service (IRS). However, this is changing with a new IRS plan to monitor checking accounts. Now, the agency is asking banks to report the annual cash flow of everyday bank holders to compare these statements against tax returns.
IRS’s recently released plan states that they intend to require banks to report the total amount of deposits, you as an individual received. This could be a violation of privacy for bank account holders who receive more than $600 in their personal accounts or make more than $600 worth of transactions in a year. Essentially, almost every bank account holder in the United States.
The goal of the plan is to find account holders who use personal checking accounts to avoid paying full tax amounts.
For example, if you’re a business owner receiving $1,000,000 into your bank account, but you’re only reporting $600,000 of income, that could potentially lead to an IRS audit. This is because IRS is going to want to know why you only reported $600,000, but in your bank account reports you received $1 million. They want to know what happened to the unaccounted $400,000. However, there are many reasons to explain this occurrence:
- There may be non-income items deposited into your account.
- You might have taken money from a credit line, a loan, or transferred money between accounts.
There are multiple explanations for why money coming into your bank account, whether business or personal, is not income.
The risk of IRS looking into personal checking accounts is that it could lead to additional audits and a violation of bankers’ privacy.
During our client’s audit processes, our office does a bank deposit analysis. This analysis finds the reason behind the differences between the deposited amount and the tax reporting value. We’ll add up the total deposits for the year, look at the total amount of money that’s going out of the account, and compare that to the tax return. If they’re off, we’ll go back to the client and ask them to justify whether each deposit is income or not income.
IRS will do that automatically in the audit. However, it shouldn’t be done on a day-by-day level for all Americans who have bank accounts in the United States.
IRS notifies companies of audits through mailed letters. Once received, they require quick and precise action. Do you know what to do if your business’ tax return was flagged for an audit by IRS? Learn more here.