- The IRS says that all income from child care is taxable income, this includes income from serving as a neighborhood babysitter, in-home childcare provider or a family-run day care in a home. In general, the IRS's audit guide for child care providers will look for income that is understated and expenses that are overstated. Because record keeping is often poor or non-existent, the IRS uses a variety of techniques to reconstruct income and expenses.
- The penalties involved in skimping on taxes depends on the method used to evade them and the amount of tax liability you owe. A failure to file a tax return may result in a 5 percent penalty for each month, up to 25 percent. The penalty for late payment of taxes owed is equal to 1/2 of 1 percent of the amount owed for each month of non-payment.
- The big risk for an informal child care provider is the risk of understatement of tax liability. If you understate taxes by either $5,000 or 10 percent of tax liability (whichever is greater), you could be liable for a 20 percent tax penalty. You may be able to avoid this penalty if you report the understatement yourself, and have a very good reason why you understated the income in the past.
- Understating income from an erroneous interpretation of tax rules can be substantial. It is not as substantial as a finding that you have intentionally and fraudulently under-reported income. The civil fraud penalty may result in a 75 percent penalty added to your tax bill. Criminal penalties may also apply.
Potential Issues
Failure to File or Late Filing
Substantial Understatement
Fraud
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