Wednesday, January 9, 2013


Over the years I have had clients say to me "My records are a mess on purpose."  "If the IRS ever audits me it will be up to them to figure it out."  Unfortunately that is not how it works.  If you don't have good records the IRS has the power to "reconstruct" your income. 

Taxpayers are required to maintain books and records sufficient to establish the amount of their gross income, and if they fail to do so, the IRS is entitled to reconstruct their income through the use of any reasonable method.

In one recent case, the taxpayer was a licensed massage therapist who failed to file federal income tax returns for several years, dealt primarily in cash, and refused to cooperate in the examination. The IRS reconstructed her income for one year (1997) based on a credit application she submitted to JP Morgan-Chase Bank. Because taxpayer "did not produce any evidence beyond self-serving testimony that [the IRS's] income determinations were incorrect," the Tax Court sustained the IRS's income determination for 2007. Carol Trescott , TC Memo 2012-321 (Tax Ct.).