If the IRS suspects a taxpayer isn’t reporting all income, it may conduct a “bank deposits analysis” to compare deposits with what the taxpayer reported on a tax return. In one case, the IRS conducted an analysis of a married couple’s business because they hadn’t reported all income and hadn’t maintained proper records. The couple objected, arguing the IRS shouldn’t arbitrarily have made decisions about deposits and withdrawals. They also stated that the IRS improperly failed to treat their cash deposits as nontaxable transfers between different bank accounts. The U.S. Tax Court disagreed and ruled that the way the IRS conducted the bank deposits analysis was appropriate. (TC Memo 2023-88)
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