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Do you report ALL your income young man? Woman?

by J. Money on Friday, January 14, 2011

man & woman behind bars
Actually, don’t answer that. Don’t want anyone getting in trouble here! :)

Was having a chat with a friend yesterday, and he mentioned that he’s making some decent money on the side doing a little graphic design.  “On the side” meaning both a side hustle like those in our series here, but also meaning “without telling the IRS.”  SCARY!!!!!  I think that pretty much summed up my response to him, haha… Well, that and “I’m too much of a pussy and would worry all the time.”

Then it brought up some other good questions/thoughts:

  1. How many others are doing this? Like, what do you think the % is of all Americans who hide this money from the gov’t? I’m guessing 50%.
  2. What are the odds of getting caught? I’m guessing, 1%.  Unless you’re not smooth. Then 25%.
  3. What HAPPENS when you’re caught? Do you get a slap on the wrist?  Do you get a free ride to the Federal P.M.I.T.A Prison? (Office Space anyone? ;)) I never want to find out.

If you haven’t guessed it already – I don’t hide squat. I’ve tried it too many times in my younger days, and it never works out.  In fact, just THIS WEEK I was accused of stealing and I didn’t even DO ANYTHING! Those same jokers at my ex-employer said they had evidence leading to me taking their property.  HAH.  If anyone has evidence in this situation it’s me.  What do you call not giving someone THEIR PAYCHECK they worked hard for 30 days ago????? Arghhhh…. but let’s not get me all fired up again.  The point is, I get in trouble even when I don’t do anything – so trying to hide money from the gov’t just isn’t up my alley.

Another thing to consider is if it’s moral or not? I wanna say no – that it doesn’t come into play here, but then again if something is illegal it usually is immoral.  Like, in this case it’s illegal because the IRS considers it stealing.  And stealing = not the right thing to do.  So if we look at it like that, then morality is now a factor.  Of course most people think it’s the gov’t that’s stealing from us, but that’s a whole other story :)  I have no problem paying my fair share to live in this beautiful and “free” country of ours. Cleanliness & safety costs money.

Anyways, that’s my thought for the day.  If you’re not paying 100% of what you owe, just give it a second thought and make sure it still aligns with the reasons behind it.  None of us can judge you for the actions you take, but you have to make sure you can own it. The guy who really stole from my ex-company has some explaining to do.

PS: Some amounts of money you don’t have to report.  I’m talkin’ about the kinds people hide for a reason (you know who you are ;))
PPS: If you want to get feisty and spill the beans, just comment as “anonymous.”

(Photo by derekskey)


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{ 38 comments… read them below or add one }

1 Andrew January 14, 2011 at 8:14 am

It’s essentially the business standard in south africa. There’s even less chance of getting caught. Durban is famous for it and most shops will ask you to please pay cash or have a “broken” card machine for a long long time.

To be more specific, despite growing up there, I would never do it. It’s just another worry, it’s immoral, and it’s not worth it. “I like taxes, with them I pay for civilisation” is something I’ve read online somewhere that I quite like.

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2 Ana January 14, 2011 at 10:12 am

What kind of amounts don’t need to be reported? I just discovered your blog and I really enjoy it! Thanks!

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3 Robert Muir January 14, 2011 at 10:43 am

If paid by a business, then you’re going to be issued a 1099 (i.e. the IRS will be informed) if the amount is over $600. The business should request a W-9 form from you so they’ll have a SSN to put on the 1099 for Uncle Sam. If the business fails to issue a 1099, then they are on the hook for fines/penalties when/if they are audited.

Here’s a site with lots of Q&As on it:
http://www.wisegeek.com/what-is-a-1099-form.htm

The nasty 1099 form also comes into play if you receive “free” stuff from a company. For example, Microsoft has user experience trials at their campus and to “pay” for your time, they give away software. But then they also give away a 1099 form. So that free $650 Office suite ends up costing you $100 or more in taxes at the end of the year.

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4 Jeremy Streich January 14, 2011 at 11:18 am

There is a line between hobby and business — profit from both a sole proprietorship or a hobby should be reported. This includes any private sale you happen to make a profit on. You are also able to deduct expenses for a hobby up to the amount you earned on it, and you can deduct business expenses if your a business (a lot more deductions, a lot more rules and a lot more paper work).

I think there is an unwritten rule of $600 profit in year before the IRS really gets angry about unreported profits. That said, I personally would never risk it — I have trouble jay walking or tearing tags off of pillows (the former is serious, the later is a joke).

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5 Maggie January 14, 2011 at 11:32 am

I *just* crossed the $600 in income mark last year, so yay me I need to figure out how to deal with that. Plus two government moves and a state who has income tax and one that dies not. (When I don’t want to change residency because of school. Ugh, mess.)

As a strange aside, thank you to everyone in the US who pays their taxes. Yes, the government can suck, but the military salaries are paid from those taxes too. (Naturally, we are taxed on that so the military kinda pays their own salaries…. Anywho.) Just a thought. ;) Paying your taxes makes sure my husband gets his meager cut for working his butt off all the time.

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6 Alex Matjanec January 14, 2011 at 11:49 am

Those who work in the restaurant and business deal with this issue all the time. If you are a bar tender for example, you need to be aware of these rules that Robert Mui laid out. A number of my friends are paid in tips, which they need to claim. Though personally I have never had to worry about this issue, a friend of mine who was a waiter didn’t claim his tips and is now paying more than $10,000 to the IRS.

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7 Andrea @ NickelByNickel.com January 14, 2011 at 11:50 am

I’d guess the amount of people on this side of the border that DON’T report sidehussle is about 50%… a lot of people that get tips think those are actually tax-free and they’re surprised when I correct them and tell them those need to be reported for income tax purposes. Working ‘under the table’ is pretty common around here… For myself, I try to stick to ‘Render to Caesar the things that are Caesar’s..’ I hate paying income tax but I do it anyway because it’s the law and I’m a goody two-shoes, lol. *sigh*

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8 Jerret January 14, 2011 at 11:56 am

And remember. If you hide income but don’t tell your spouse and you file a joint return, your spouse would be on the hook for any penalties as a result, whether they knew about the hiding or not.

The onus isn’t on the company/person to send a 1099. The onus is on the person receiving the income to report that income :-)

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9 Robert Muir January 14, 2011 at 12:00 pm

@Jerret – “The onus isn’t on the company/person to send a 1099. The onus is on the person receiving the income to report that income”

Very true Jerret. Many of my clients either don’t create a 1099 or it somehow doesn’t get to me. So I just add up the income from all my receipts and claim the difference between that total and the amount of 1099s that I did receive as misc. income. That way the IRS can’t nail me – well at least on that issue. :)

A whole nother topic is valid deductions! :-D

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10 Jennifer Lissette January 14, 2011 at 12:35 pm

I have really strong feelings about paying the taxes that you owe because of the ordeal my father put me through as a teenager. My father has always been “penny wise but pound foolish.” In this case, he tried to save a bit of money on taxes that ended up costing me in the end.

My father used to try to hide his money from the IRS by putting money in my name. I knew I’d never see a cent of it, and I knew it would hurt my eligibility for student aid, so when I started applying for college I asked him to take the money out of my name. He took the money out of my name, but little did I know, he still didn’t report it on his taxes.

Fast forward a year, and I’m a freshman in college. I have chosen a private college because they offered me a great ride, half scholarship, half grants. However, the financial aid department decided to go over my father’s financial records with a bit more scrutiny. They found the money he was hiding, don’t ask me how, and my Estimated Family Contribution was lifted; it was lifted $90 over the limit allowed for my grants. I lost $10,000 in grant money and the college gave me a choice: take private loans to cover the difference or drop out within a week and they wouldn’t bill me.

I took the loans, but I never forgave my father for putting me in such a crappy situation. Had I known I wouldn’t be receiving the grants, I would’ve gone to an equally prestigious state school whose entire yearly tuition was less than that loan I was forced to take.

Since then, I’ve had some opportunities to wiggle out of paying taxes. I don’t. The US government got Al friggen Capone for tax evasion. I have no doubt that sooner or later, they’d catch up to me, too.

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11 AnonBlogger January 14, 2011 at 1:59 pm

I made just over $1,000 from blogging and other side income, like Cash Crate. Technically, I should include that when I file my taxes. But I probably won’t. I’m a student and have no federal income tax liability. I also have “business” expenses like hosting and whatnot that would drive down my taxable income, so I’m calling it even.

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12 retirebyforty January 14, 2011 at 2:37 pm

20 years ago, I didn’t report tips, rental income from renting out a room, selling stuff at garage sale, and more.
These days, I report everything to protect myself. I have more to lose now.

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13 Travis January 14, 2011 at 3:18 pm

As a CPA, I see cases every day where people try to hide additional income from side jobs so they will not have to pay additional tax. The tax on this income is not just at the standard rate for your income level, but self-employment tax also comes into play (the 7.65% social security and medicare tax that your employer usually pays).

An important fact to keep in mind, however, is that if this additional income is truly from a trade or business, you can also deduct business expenses against this amount. For instance, if you are making money from doing graphic designs on the side, think of the expenses you incur in conducting this business. Your computer, home office expenses, supplies, advertising, etc. After adding all of these up, you may actually have a net operating loss for the year to offset your normal wages.

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14 J. Money January 14, 2011 at 3:37 pm

@Andrew – Amen brotha. Pretty interesting about Durban, never heard that before… or of Durban, really, but still fascinating :)
@Ana – I think the others who’ve commented here have it right – $600 or more from one person/company. Although, I heard recently that they’re getting stricter in 2011? At $400? I haven’t researched it yet, but it’s still a safe rule to just account for everything.
@Robert Muir – Oh man, nothing is “Free” anymore ;) All those free Cars and vacations from Oprah? Gotta pay taxes!
@Jeremy Streich – haha… good one, sir.
@Maggie – Ooh really? I’d never thought about that. My dad is a retired Marine so I guess I help pay for that too, eh? Cool :) And there’s a real easy way to account for your $600+ money – just put aside X% for taxes later. Nice and easy! (not really, it’s hard not to spend it – haha…)
@Alex Matjanec – WOW. Yeah, that’s no joke. Gotta report those tips!
@Andrea @ NickelByNickel.com – Haha, you and I both girl.
@Jerret – Woah! Didn’t even consider that. Man… time to shakedown the wife tonight! And not in a good way ;)
@Robert Muir – Valid deductions – your turn to blog about it ;)
@Jennifer Lissette – Damnnnnnnn. That sucks, I’m sorry to hear that. Maybe the lesson will save you from doing something stupid down the road? Either way it blows. I’d be pissed too… just sucks that he’s family. (I mean for holding grudges, not that you’d want him to NOT be in the family, haha… that could have come out wrong)
@AnonBlogger – Thanks for sharing the honesty ;) I think you have a certain level of income to make too before you get dinged anyways. Another thing I should probably research to learn more about.
@retirebyforty – Maybe that, or maybe we’re older and wiser now? ;)
@Travis – Yessirrr. Good good info.

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15 Phobiaphobe January 14, 2011 at 4:10 pm

My estimate would be much less than yours on how many people are hiding real income from the IRS. I’d say 5-10%. Odds of getting caught? I’d guess 50%. Doing such a thing is not a gamble I would take part in, because I fear the government. It isn’t income I’d want to hide, but holdings and real gain. If a person can save himself rich, he ought to be able to keep the fact private. I do completely object to any entity that would ask for a tax return to prove something. I think a person’s business with the IRS should be private. Pay stubs and proof of employment are a different matter, but only if the entity demanding them has good reason to do so.

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16 Jenna January 14, 2011 at 4:59 pm

I feel like those are the same type of people that stay on unemployment for forever, because they make more on unemployment then their couple of job offers. Super annoying to hear about as a tax payer.

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17 Stephanie January 14, 2011 at 7:38 pm

I always wondered how people who make a lot of money blogging file their taxes on that income. Especially if you get smaller amounts of money from a lot of sources.

Have you hit that mark with your blogging?

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18 Justin January 14, 2011 at 7:57 pm

Haven’t checked into your blog for a while, and was thrilled above all else to see the Office Space reference. Heheh…

I strive to some day be in a good enough side-hustle position to have income that might need to be reported. As it stands, it’s slow going trying to balance a full-time job (paid above the table, I swear) and muster the motivation to seek out extra income in my off-time. But, as usual, reading the better PF blogs out there (yours included) help me keep up that determination. Thanks for that, even if I haven’t been doing my part by reading regularly. :-)

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19 Investing Newbie January 14, 2011 at 9:00 pm

Since I only earn about $5.07 in my day job, honestly it would be a joke if I didn’t report it all. LOL. Truthfully, I feel people are more inclined to lie to the government because it is this huge entity that controls the creation of money. So you aren’t really “stealing” if they can just create more. And unless the amount you are stealing is in the high billions, you aren’t going to deflate the currency on any serious scale. Just providing rationalization and not a justification.

That said, while very few people do get caught, the penalty is enough to scare anyone straight. Usually the fines are up to 20K and/or jailtime. So, if you want to earn a couple of thousand on the side, just think about how that will help you when you’re 20K in the hole or in jail.

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20 TJ January 14, 2011 at 9:32 pm

how bout sales/use tax? do you report all those “tax-free” amazon purchases ?

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21 Jaime January 15, 2011 at 6:58 am

Yeah I do better safe than sorry.

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22 J. Money January 15, 2011 at 11:56 am

@Stephanie – Yup! But I’ve been reporting my blog income even when it was just $22.00 from a year of Adsense! haha… reporting income on blogs is no different than other ways you get money. I basically just say “I earned $1,000 this year that has not been taxed” and then i pay whatever tax it comes out too. Or, I should say my accountant does it all for me ;) There’s def. more to it, but in the grand scheme of things all you have to do is remember to report your income for the year.
@Justin – Hey Justin! Nice seeing you back bro, I remember your blog – has a nice ring to it ;) Glad you appreciate the Office Space mention – I came close to spelling it all out but thought it was a bit extreme, haha… wonder if I had more or less clicks to the video abbreviating like that?
@Investing Newbie – Exactly. No f’ing way I’m risking $20k or worse than that – JAIL!! NO. F’ing. Way.
@TJ – I have no idea what you’re talking about. You don’t pay tax on Amazon purchases? and you have to report it? confused.

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23 Noah January 15, 2011 at 12:20 pm

I have a buddy who made probably $1500 last year doing some web development/tech support on the side. His wife also babysits frequently and probably brings in $100 extra a month. They won’t be reporting that income and I don’t blame them. I wouldn’t either. There is virtually little or no chance of getting caught, especially when cash is involved. The govt gets enough of my taxes every year. In fact I buy most things on Amazon.com to avoid tax.

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24 CouponPrincess January 15, 2011 at 8:04 pm

As a person that has had her fair share of problems with the IRS, I REPORT EVERYTHING! THIS INCLUDES THE LINT IN MY POCKET!!!! I just finished paying them jokers for tax years 2007 and 2008.

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25 Stephanie PTY January 15, 2011 at 9:59 pm

I know what TJ’s talking about when says Sales/Use tax (most states call it “Sales and Use Tax.”) Argh, it’s been a big point of contention with online shoppers for years now, which is why we tend to think of it in terms of Amazon, although it applies to all online retailers. Basically, online retailers are only required to charge sales tax on purchases where they maintain a physical presence. So if Amazon has a warehouse or office in your state, you will pay sales tax when you order from Amazon. If they don’t, you won’t see sales tax on your orders. The issue here is that most states feel very angry about the idea that you bought something and didn’t pay sales tax (how dare you!?!). So those states (including New York and Virginia, I’ve noticed), will ask you on your state tax forms how much stuff you bought out of state that year. It ends up being a $5 or $10 charge, usually, unless you tell them you bought like 5 Ferraris on ebay ;)

To answer TJs question about this: yes, I always pay the $5 or $10, rather than trigger an audit. There was a rumor going around in New York that if you claimed that you spent $0 online two years in a row, they’d automatically audit you. Probably not true, but who wants to risk it just to save that little?

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26 Donna Freedman January 16, 2011 at 4:17 am

I pay quarterly taxes on my income as a freelance writer. You better believe I keep receipts for any and all business expenses, from my new laptop to the bus fare to get to an interview.
Incidentally: A friend of mine was randomly audited. Some of her deductions were questioned. She appealed, and not only did the second IRS agent agree with her, but also pointed out some other business deductions she could be taking. Just wanted to let you guys know that sometimes there’s a happy ending where the revenooers are concerned.

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27 Pete Low @ ineedmo January 16, 2011 at 3:17 pm

I get 1099s for random online earnings, so yeah, I report it all, and the self-employment tax is the part that really hurts, because I don’t earn that much to need to pay much tax otherwise, even including what I earn at my regular job. The only thing that helps chip away at the amounts on the 1099s is keeping track of as many deductible things as possible, like Donna Freedman said.

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28 J. Money January 16, 2011 at 3:51 pm

So interesting about that Amazon stuff – never seen or heard about it in my life. Not sure I’ve even seen that “how much money have you made outside of the state?” line either. Maybe us Marylanders pay tax on Amazon? Who knows…. you learn something new every day ;)

@Donna Freedman – That is AWESOME! Love that they helped her out like that. There is hope!!

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29 Anon January 16, 2011 at 6:07 pm

but you dont tell us how much money you make from your blog so how do we know you report everything?

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30 J. Money January 16, 2011 at 6:24 pm

it’s up to you to trust me or not – I know I’m telling the truth ;)

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31 Funny about Money January 16, 2011 at 7:45 pm

LOL! I’m just too, toooo compulsive not to report every stupid penny. Whenever a check comes in from a client, it goes directly into the business checking account, and the corresponding entry goes into the Excel spreadsheet. Unless the person handed you a wad of cash, how would you hide it? There’s not only the huge risk that they’d emit a 1099, sending a copy to the IRS for you, but wouldn’t anything that landed in your bank account also be reported to the IRS? Ditto anything that came to you through PayPal?

Dollars to donuts every sou Adsense pays you through PayPal is reported straight to the gummint.

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32 20 and Engaged January 16, 2011 at 7:47 pm

Like you mentioned, if you make under a certain amount, you don’t have to report it. I come under that threshold, so the rules (in this case) don’t apply :)

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33 twentysomethingmoney January 17, 2011 at 4:59 am

I this day of age, where everything is online (to a global level), its dumb to even try to hide or ‘not report’ income… Your bank account knows all.

Even the person paying you in cash, has to report it SOMEWHERE….

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34 J. Money January 17, 2011 at 4:04 pm

True true – if there’s a trace online, there’s a chance of getting caught! No thanks.

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35 Pretty Unfamous January 17, 2011 at 4:18 pm

I wouldn’t say something illegal is necessarily immoral. Would you say that loitering is immoral? I don’t think so. But it’s illegal.

Hmmmm I think it’s probably less than 50% of people who make a side income, but this is “income.” I don’t think 50% of people make an INCOME from side jobs. I’d say maybe 20-30%, but that’s just my guess. But if you look at 14-year-old girls who babysit, then I’m sure it’s 100% of them who don’t pay taxes on it. But unless they’ve made their own Babysitter’s Club, the chances of them getting caught are less than 1% I’d think.

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36 Phobiaphobe January 17, 2011 at 4:46 pm

If Amazon purchases are cheating, I do cheat in that way. And I will continue to do so as long as I can. The states have been trying for quite awhile to force the collection of taxes through Amazon, but have not succeeded. Because I don’t have to pay sales tax on the great majority of things on Amazon, I spend much more money than I used to before I discovered it. Spending helps the economy, but mine would be vastly reduced just on principle if I had to pay sales tax at Amazon. You hear people say that WalMart hurts small businesses – I do not shop at WalMart, but neither will I shop where I am overcharged just to help the local economy – not talking taxes there. But as far as taxes, my local economy has suffered because given a choice, I will not pay sales tax.

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37 katie May 12, 2011 at 7:19 pm

Pretty late in this discussion – but oh well!

When I was bartending – it was ALL cash. My employer didn’t track a penny of tips. Hourly wage, sure – but even that wasn’t “true” – she only reported that we worked 24 hours a week whether we worked 16 hours or 80 hours.

Many of the girls I worked with only claimed enough to cover the minimum wage stipulation. Not me. I recorded and reported every cent.

For one, I was receiving state daycare assistance as I was going to school full-time – so I had to report my income to have the right amount of assistance. The state didn’t pay for all it (actually, not even half of it) but I didn’t want to get audited by the state and then owe those suckers money for fraudulant assistance and then never be allowed to have assistance again if I really did need it.

For two – I did the calculations. By being honest, I got the most back (tax refund – thanks EIC!) than if I tried to hide what I made.

Besides, I just don’t want the IRS all up in my business. I don’t want to deal with an audit, fines, penalities, interest – any of it.

Now, when my momma gave me money, to say, go to the dentist, I didn’t report that as income, cause it was a gift. And even if she gifted me some money throughout the year, she never gifted me anywhere close to the $13,000 or whatever which is the magic number that you have to report.

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38 J. Money May 13, 2011 at 11:36 am

“Besides, I just don’t want the IRS all up in my business.” – Haha. You got that right! #1 reason for me playing it straight too :) And you’re totally right about the “gifting” stuff.

Thanks for joining the convo! It’s always fun going back and remembering previous articles… much better than them just dying off ;)

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