Net-Worth Method
Definition
An indirect method of proving unreported income. The investigator establishes opening and closing net worth, adds known expenditures, subtracts documented income, and treats any unexplained surplus as taxable income. Used against Capone in 1931 and still a standard IRS technique.
- Method type
- Indirect proof of unreported income
- Formula basis
- Closing minus opening net worth, plus expenditures, minus known income
- Historical case
- Used against Al Capone, 1931
- Current use
- Standard IRS technique
Common questions
Why use an indirect method instead of examining income records directly?+
It works when direct income records are absent, destroyed, or deliberately falsified, inferring income from growth in assets and lifestyle spending instead.
What is the main defence against a net-worth-method assessment?+
Showing a non-taxable source for the unexplained surplus, such as gifts, loans, inheritance, or cash already on hand before the period examined.
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