By Eric Smith
The CPA Journal
November 2015 Edition
Taxpayers involved in cash businesses are frequently under the incorrect impression that they are audit-proof and free from risk of criminal liability when the income and deductions reflected on their tax returns match their business’s books and records. While cash businesses by their nature make demonstrating understatements of income or overstatements of
expenses generally more difficult, the government has developed numerous indirect methods to overcome these issues in either an audit or prosecution of cash business taxpayers. Because these indirect methods focus on recreating the taxpayer’s income over one or multiple tax years, a professional defending such a taxpayer will usually need to painstakingly examine all of the taxpayer’s assets, liabilities, and expenditures during that period. This article will describe the most common types of indirect methods used by the government and the most frequent defenses used in defending such taxpayers.