If the IRS suspects a taxpayer isn’t reporting all income, it may conduct a “bank deposits analysis” to compare deposits with what was reported on a tax return. In one case, the IRS found that a taxpayer had unreported income after conducting a bank deposits analysis. When notified of the unreported income by the IRS, the taxpayer didn’t reply. During the IRS examination, the taxpayer (an IRS employee who also ran a business) was found to be uncooperative. He failed to supply accurate business records, which led to suspicion of fraud. The outcome will be determined at trial, with respect to possible fraud, penalties, and disallowance of business deductions. (TC Memo 2023-124)
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