How to report a tax cheat

Q. I just found out my sister has been cheating on her taxes by not claiming income from a side business. We’ve never really gotten along and I guess it’s not my business, but she was just boasting about it and it just doesn’t seem right. Is there something I should do?
— Angry

A. Of course lying to the IRS is wrong, but whether or not you should get involved with your sister’s situation is a dicey question.

Your sister should be reporting all of her income from any source including her side business to the IRS, said Patricia Daquila, a certified public accountant with Lassus Wherley in New Providence.

If your sister isn’t reporting all her income, she’s not complying with tax laws and could be subject to penalties, fines and even criminal prosecution, Daquila said.

“You may want to discuss this with your sister and suggest that she reports her income to the IRS,” she said. “She could then go back and amend her prior year taxes to include the income.”

There is a way you can report her.

If you suspect or know that an individual or a business is not in compliance with the tax laws, then you can report it to the IRS by filing Form 211 under Section7623 (a) or (b), which is called application for award for original information, Daquila said. The application is then handled by the IRS’ whistleblower office.

“The IRS may pay an award to a person who provides specific credible information to the IRS which results in the IRS collecting taxes, penalties and interest from the non-compliant taxpayer,” she said.

Daquila said the law provides for two types of awards which are based on the amount that the IRS collects. For an individual, if the gross income is more than $200,000, the reward can be 15 to 30 percent of the amount collected. If the individual gross income is less than $200,000, then the maximum reward amount would be 15 percent.

“The IRS is looking for `’solid’ information and is not looking for speculation,” she said. “It is not a program for resolving personal issues or business disputes.”

While you may be tempted to tell, you have no obligation to report this to the IRS, said Joseph Matheson, a certified public accountant with Matheson & Assoc. in Whippany.

“It is frustrating to see some people getting away with paying no tax on income, which causes all the rest of our taxes higher to cover their deception,” Matheson said. “I would urge your sister to be legitimate with her income taxes.”

If do you report her, you could be in for more family trouble.

“I think her family might disown her for turning her sister in,” Matheson said.

Good luck.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.