On his tax return for year X, Evan reported $40,000 of taxable income.

After a review of Evan’s assets, the IRS concluded that he had $115,000 in cash, $300,000 in stocks, and $400,000 in real estate at the beginning of year X. At the end of that year his cash was at $75,000, his stocks at $350,000 and real estate at $425,000. The IRS determined that his living expenses in year X were $50,000.

1/Evan did not keep adequate records of his income or expenses in year X. How is the IRS likely to reconstruct his income for the year and what might they conclude?

2/What are the defenses that Evan might offer to the conclusions reached by the IRS?

Answer rating: 100% (QA)

1 In the absence of adequate records the IRS may use indirect methods to reconstruct Evans income fo... View the full answer