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2. Briefly explain the net worth method of reconstruction of income.

2. Briefly explain the net worth method of reconstruction of income.

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net worth method of reconstruction of income

The net worth method is a common method of reconstruction of income.

To use the networth technique, an IRS agent must calculate the person's net worth (the known assets less known liabilities) at the beginning and ending of a period. The agent adds nondeductible living expenses to the increase in net worth. If there is a difference between the reported income and the increase in net worth during the year, the agent tries to account for the difference as (1) nontaxable income and (2) unidentified differences. Any unidentified difference may be an
approximation of the amount of a theft, unreported income, or embezzlement amount (e.g., an inference of unreported
incom

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