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A. Unreported Income
Gross income generally includes “income from whatever source
derived”, unless specifically excluded by statute. Sec. 61(a).
Taxpayers are required to maintain records sufficient to establish
the amounts of income, deductions, and other items which underlie
their Federal income tax liabilities. Sec. 6001; sec. 1.6001-
1(a), (e), Income Tax Regs. If a taxpayer fails to keep adequate
books and records, the Commissioner may reconstruct the taxpayer’s
income by any method that is reasonable under the circumstances.
Petzoldt v. Commissioner, 92 T.C. 661, 687 (1989); see also United
States v. Fior D’Italia, Inc., 536 U.S. 238, 243 (2002) (stating
that the assessment authority of the IRS is not exceeded “when the
IRS estimates an individual’s tax liability--so long as the method
used to make the estimate is a ‘reasonable’ one”). The
reconstruction need not be exact, so long as it is reasonable and
substantially correct. Petzoldt v. Commissioner, supra at 693;
Meneguzzo v. Commissioner, 43 T.C. 824 (1965). The use of bank
deposits is recognized as a reasonable method of reconstructing
income. Parks v. Commissioner, 94 T.C. 654, 658 (1990); Tokarski
v. Commissioner, 87 T.C. 74, 77 (1986); Nicholas v. Commissioner,
70 T.C. 1057, 1065 (1978). This method is premised on the
assumption that the deposits into a taxpayer’s account consist of
income from taxable sources. See sec. 61(a).
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Last modified: May 25, 2011