Good recordkeeping can be a lifeline for taxpayers facing an IRS audit. Otherwise, the IRS can reconstruct income using a “bank deposit analysis,” which assumes that all deposits to accounts in a given period are taxable income. In one case, a married nail salon owner was audited using this type of analysis. The couple admitted making unreported deposits into their business account and depositing business checks into their personal account. However, they argued some deposits were nontaxable gifts and loans from friends and family members but no proof was provided. The U.S. Tax Court ruled that gross receipts were underreported and that other deposit irregularities existed. (TC Memo 2020-27)
