If you run your own business, or do freelance work, you may get a lot of your payments in cash. It may be tempting not to claim this income on your taxes. How is the IRS going to know about it?
Likely consequence: The IRS isn't as clueless as you think. The IRS looks for norms by profession and geographic area. If you're constantly reporting on the low end, you may already be on their radar. Underreporting may lead to an extensive audit in which the IRS requests copies of all transactions made in your bank accounts and third-party accounts like those at credit-card-processing companies and PayPal. Even more damaging, if you underreport by more than 25%, the IRS may extend the time to look back at your records, carrying the statute of limitations back as far as six years. Depending on the amount, along with a bump in tax together with interest and penalties, the IRS may refer you for criminal prosecution.