In my experience, clients are completely honest in reporting their income. Of course, this is easy when most income is reportable directly to the IRS via w-2's and 1099's! However, there is income some taxpayers think is non-reportable.
One of the first courses I took as part of my MST (Masters-Taxation) program was on the basics of income taxes. In this class, my instructor would repeat the following phrase over and over again:
"All income regardless of amount or source derived is taxable unless specifically excluded in the tax code." This phrase is taken from Section 61 of the Internal Revenue Code.
Have you ever said, "I didn't get a 1099 for that income; therefore, I don't have to report it". WRONG. All income regardless of amount or source derived is taxable; and interest income is certainly not excluded. Therefore, if you earn $1 of interest income, it is reportable as income even though you did not receive a 1099.
Then why don't banks send the 1099? It reduces the cost and time burden associated with generating low income 1099's for the banks, taxpayers, and the IRS. And some banks may elect to send them anyway as it may be easier for them to avoid segregating customers.
Even worse, some taxpayers think if they are self-employed and don't receive a 1099 for the work they have done, they also don't have to report that. WRONG. The reporting requirement for businesses to generate a 1099 is for anyone who has been paid more than $600. This does not mean, if you don't get a 1099, the income is not reportable.
Like my professor, I will repeat again. All income regardless of the amount or source derived is taxable unless specifically excluded in the tax code.