Forensic Accounting Chapter 6

6 forensic accounting 11 minimum income probes what

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Unformatted text preview: obes What the Secretary Giveth The IRS’s authority to use an Indirect The Method is set forth in Code Section 446 (b) (b) “If no method of accounting has been If regularly used by the taxpayer, or if the method of accounting does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Note: Reference Textbook Section 6001 Secretary does clearly reflect income.” Secretary Chapter 6 Forensic Accounting 12 Minimum Income Probes Congress Takeith Away The use of indirect methods to reconstruct income by the IRS is limited by Code Section 7602 (e) Section “The use of financial status or economic The reality techniques to determine the existence of unreported income is prohibited unless the IRS Agent has a reasonable indication that there is a likelihood of unreported income.” Chapter 6 Forensic Accounting 13 Minimum Income Probe Nonbusiness Tax Return IRS Agent questions the taxpayer or the taxpayer’s representative about the possible sources of other income. possible If the IRS Agent finds no other If information indicating potential unreported income, The minimum income probe is met. The Chapter 6 Forensic Accounting 14 Minimum Income Probes Self – Employed Tax Returns For taxpayers who are self-employed For and file Schedule C - Profit or Loss from Business, or Schedule F - Profit or Loss From Farming An analysis of tax return is made To determine if reported income is sufficient to support the taxpayer’s Chapter 6 Forensic Accounting 15 Lifestyle Probes An individual’s lifestyle or An lifestyle changes may provide clues as to the possibilities of unreported income possibilities and / or fraudulent activities. Obvious lifestyle changes: Obvious • Lavish Residence • Expensive Cars, Motorcycles and Boats • Vacation Home(s) • Exclusive Private Schools for Children • Exotic Vacations Note: Reference Textbook Section 6011 Chapter 6 Forensic Accounting 16 IRS Financial Status Audits IRS 1995 1995 IRS began a program called Economic Realty Audits Realty or or Lifestyle Lifestyle Audits Audits Chapter 6 The Goal : Uncover Unreported Income Unreported by comparing the by Taxpayer’s Reported Income Reported with the Taxpayer’s with Lifestyle. Lifestyle. Forensic Accounting 17 Indirect Indirect Methods To To Identify Identify Unreporte d Chapter 6 Forensic Accounting 18 What Are The Indirect Methods Indirect To Reconstruct Income ? To 1. Market Segment Specialization Program Program 2. Cash “T” Cash 3. Source and Application of Funds also known as the Expenditure Approach Approach 4. Net Worth Method Net Note: Reference Textbook Sections 6031, 6041, 6051, 6061, 6071 Note: 5. Bank Deposit Method Bank Chapter 6 Forensic Accounting 19 Indirect Methods To Indirect Reconstruct Income Should Be Used When: Should The books and records are inadequate . The books do not clearly reflect total The income. income. There is a reason to believe that the There subject has omitted income. subject There is a...
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This note was uploaded on 09/09/2013 for the course ACC 468 taught by Professor James during the Fall '12 term at SIU Carbondale.

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