Bank Deposit Method of Proving Unreported Income Law and Legal Definition

This is a method used by the IRS to probe for income and is one of the favorite indirect methods of proving unreported income. IRS tallies up the deposits made in a person’s bank accounts and compares the total with the reported income. If the deposits are more than that is claimed to be earned, the difference to taken as unreported income. It is based on the theory that if a taxpayer is engaged in an income producing business or occupation and periodically deposits money in bank accounts in his or her name or under his or her control, an inference can be drawn that such bank deposits represent taxable income unless it appears that the deposits represented re-deposits or transfers of funds between accounts, or that the deposits came from non-taxable sources such as gifts, inheritances or loans. The theory also contemplates that any expenditures by the person of cash or currency from funds not deposited in any bank and not derived from a non-taxable source, similarly raises an inference that such cash or currency represents taxable income.

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