How risky was this illegal behavior by my ex in laws?

The IRS does a lot of random auditing thess days; hiding finanacial info (other than cash under the mattress or gold buried in the yard) is almost impossible, and the flow of information never stops.

The IRS gets a copy of my annual interest, dividends, capital losses and gains from my investment portfolio. There are no longer any secrets.

Your ex-mother-in-law was lucky.

Social Security even knows about my tax-free interest income. They write and tell me annually when they are determining my Medicare A, B and D annual fees.

I may be totally wrong here but I do not see what was risky or illegal. When you are of retirement age you are entitled to SS benefits. The whole thrust behind privatizing SS is so people can invest and wind up with interest and dividend income to supplement their lifestyles they enjoyed when working. Good for MIL for being a wise old investor.

@Cruiser she did not report interest income. Even she knew it was illegal because she said, “they aren’t going to arrest an old lady like me.”
Her bank and brokerage firms sent her interest income reports to file with her tax returns and she trashed them.

The income on common stocks are dividends. Interest accrued on bonds.

People who are retired and getting Social Security Benefits still have to fille their income taxes and pay taxes. I am retired, I get SS benefits and I certainly file fed and state tax returns and pay taxes on any supplemental income I have.

ok; then I meant dividends. Don’t know if they had bonds.
” I am retired, I get SS benefits and I certainly file fed and state tax returns and pay taxes on any supplemental income I have.”
This sounds so paranoid as if you think I’m wondering about @gailcalled ‘s tax returns. lol

She ran some risk – as others have said, the IRS gets the numbers reported straight from the brokerages, and somewhere along the line, if the IRS felt like it, they might connect the dots.

On the other hand, the $$ involved might have been piddling – a lot to your mother, but below the amount that would trigger a closer look by the feds.

Or maybe she is so old (they don’t like picking on old people, it’s bad publicity) that they left her alone.

Bottom line, she was certainly technically in violation, but probably is too small a taxpayer for them to care.

If the US is anything like Canada, it depends on how much interest she was earning. Possibly, it was below whatever the cutoff is to begin reporting it, or to begin paying taxes on it (which can mean the same thing).

It all depends on what kind of amounts we’re talking about. If her investment income was still below the taxable threshold – or close enough to not justify an auditor’s time for the minimal returns to be expected from a full audit – they may have elected to ignore her non-compliance as to reporting.

The IRS doesn’t make arrests – as far as I know – for an initial failure to file. If there is evidence that the failure to file may not match the taxpayer’s lifestyle, then they will attempt to reconcile the observed evidence: large bank deposits, stock holdings, paid-off mortgages, expensive cars, boats and other property, with the taxpayer via audit and requests for information (and tax returns, of course). It’s only when they suspect or have direct evidence of “high value” tax evasion, fraud, money laundering or other highly lucrative and illegal activity that they “swoop in and arrest”. And they make a lot of mistakes in doing that, too, so they’re sensitive to the adverse publicity it generates – as much as they want to intimidate people into routine compliance. It’s a balancing act.

As for your mother-in-law not reporting even “somewhat substantial” investment income, they may still determine that the prosecution risk is not worth the expected return. They run actuarial tables, too, and they may have made a cold-blooded decision that “at the end of their lives we don’t want to prosecute these taxpayers – we’ll collect from the estate soon enough, anyway”.

So the question is (it’s a rhetorical question): “How much interest are we talking about?”

It’s also possible, depending on what paid her interest, that the interest was tax-exempt in the first place.

The interest and dividends is reported to the IRS. I don’t see how she gets away with supposedly not recording it on her taxes? If the financial institutions withhold taxes, she might not even owe money.

If she is cheating was cheating the system and had been caught they would have had to pay up.

@CWOTUS She always filed. It was not my mother; it was my MIL and they were very comfortable financially. Her husband had retirement from a large oil company in Dallas but they were careful with their spending from Day One. She once told me she would never take advantage of him and they lived beneath their means. Very wise.

I don’t see proof of any illegal behavior. I see she made a comment about “they’re not going to arrest” and the hubby disputes her calling their income “fixed income” but other than that, no proof, just speculation she committed a crime based on one comment?

Her son , after she said , “our living on a fixed income* replied, “what about all that interest you’re collecting on your stocks and bonds?” and she said, “oh, they’re not going to arrest an old woman like me.”
It actually passed through my brain at the time , “do people living on fixed incomes have brand new homes , furniture and cars?”

When did this exchange take place?

Many people do. Fixed income can be an enormous figure. If you have 50 million in savings and investments, you have a pretty nice yearly income.

At 2% tax-free, that’s $1,000,000 in annual spendable income.