Question

agent may not use indirect methods to determine unreported income True or false?

Answer 1

True.

Agent may not use indurect methods to determine unreported income. This is because use of indirect method to reconstuct the income is limited by code 7602(e). And this code prohibits the technique to determine the unreported income unless agent has reasonable evidence or indication that the taxablr income is ommited to report.

Some of the indicators can be considered as reasonable evidence that taxpayer has ommited to report taxable income-

• Books of accounts or records are not maintained
• Inadequate internal controls
• High amount of cash is involved in business
• Inconsistent variance in profit percentages
• Unexplained deposits