Venar Ayar, IRS Audits
Methods for Reconstructing Cash Income In Tax Audit

After the Service has targeted a cash business for audit, laid a foundation, examined applicable records, and interviewed the taxpayer, the nitty gritty begins. The auditor will indirectly reconstruct business income if the records are inadequate, inconsistent with the interview answers, or otherwise suspect.

In general, IRS audit methods can include indirect income reconstruction if there is a reasonable indication of potential unreported income. That’s a pretty low standard, so auditors frequently employ this tactic. Cash businesses are especially at risk. The IRS essentially presumes that marijuana dispensaries and other such businesses underreport their income.

Direct Income Reconstruction

Purchase history often reveals accurate sales data. For example, if a car dealer purchased 100 smog certificates from the state or federal government, the dealer most likely sold 100 cars. Or, if a video game store purchased fifty Call Of Duty WWII games and has none remaining in its inventory, the shop most likely sold all fifty copies. Normally, auditors give owners a chance to explain any discrepancies before they do the math themselves.

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