Forensic Accounting Chapter 6

Is a reason to believe that the there subject has

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Unformatted text preview: significant increase in year-to-year net worth. year-to-year Chapter 6 Forensic Accounting 20 Indirect Methods To Reconstruct Income Should Be Used When: Gross profit percentages change Gross significantly for that particular business. business. The taxpayer’s business and personal expenses exceed reported income and and there is no obvious reason for the Chapter 6 Forensic Accounting 21 Indirect Method #1 Market Market Segment Segment Specialization Program Program Chapter 6 Forensic Accounting 22 Market Segment Specialization Market Program Program The IRS uses Forensic Accountants that The highly trained to examine businesses within a particular market segment or industry such as: industry Construction Real Estate Commercial Fishing Commercial An integral part of the IRS’s approach is the development and publication of specialized specialized Audit Technique Guides. Audit Chapter 6 Forensic Accounting 23 The IRS Audit Technique Guides Guides These Guides contain: Examination Techniques Common and Unique Business Common Practices Industry Terminology Practices Specialized Information - To assist IRS Specialized Agents performing these examinations. examinations. Forensic Accountants in private Forensic practice should consult the IRS Guides when dealing with matters in a particular Chapter 6 Forensic Accounting 24 Indirect Method #2 The The Ca$H “ T “ Ca$H Chapter 6 Forensic Accounting 25 Ca$h “T” Is an analysis of all of the Ca$h Is received and all of the Ca$h spent over a period of time. The theory of the Ca$h “T” is: The If during a given period a taxpayer’s If expenditures exceed reported income, and the source of the funds for such expenditures is unexplained, Then the excess amount represents Unreported Income. Unreported Chapter 6 Forensic Accounting 26 Chapter 9 Forensic Accounting 27 The “Jerardo Case” The Background Information: Steven Jerardo works for the City of Phoenix, Steven Arizona in the Parks Department as a “Grounds Maintenance Worker” and his annual salary is $45,000. His daily work involves cutting grass, trimming hedges, and preparing ball fields for youth baseball, soccer, and football games. soccer, Steven Jerardo also owns a “Landscaping Steven Service.” The business is operated out of a large rented warehouse and employs two (2) workers, Juanita and Reno. Chapter 6 Forensic Accounting 28 The “Jerardo Case” The Background Information: Steven Jerardo owns a house in addition to Steven numerous vehicles, trailers, and a boat. numerous A confidential informant working with the confidential Phoenix Police Department says Steven Jerardo is running a marijuana smuggling operation out of the warehouse he uses for his “Landscaping Service.” his The Phoenix Police Department issued many The subpoenas to obtain information on Steven Jerado’s financial transactions. Jerado’s Chapter 6 Forensic Accounting 29 The “Jerardo Case” The Objective: Determine if Steven Jerardo has income from Determine unknown sourc...
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