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Jenkins discussed with petitioners each tax return she
prepared for them. When Jenkins asked petitioners whether all
of their income was accounted for, petitioners answered
affirmatively. Petitioners did not tell Jenkins about any
income they received from illegal gambling activities.
On their 1987, 1988, 1989, and 1990 Federal income tax
returns, petitioners reported total income (or loss) in the
following amounts:
Total Income
Year (Loss) Reported
1987 $8,403
1988 (5,692)
1989 19,422
1990 20,975
Petitioners filed their 1987, 1988, 1989, and 1990 Federal
income tax returns on November 17, 1989; October 10, 1989; April
19, 1991; and April 15, 1991, respectively.
Respondent’s Income Reconstruction
The Internal Revenue Service audited petitioners’ 1987,
1988, 1989, and 1990 Federal income tax returns. During that
audit, respondent’s revenue agent concluded that petitioners’
records were inadequate. Consequently, the revenue agent
performed a bank deposits plus cash expenditures analysis to
reconstruct petitioners’ income.
The revenue agent’s analysis, which is reproduced as the
appendix to this opinion, reflects these four steps: First, the
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