Method used by the IRS that proceeds on the theory that if a taxpayer is engaged in an income producing business or occupation and periodically deposits money in bank accounts in his name or under his control, an inference arises that such bank deposits represent taxable income unless it appears that the deposits represented re-deposits or transfers of funds between accounts, or that the deposits came from non-taxable sources such as gifts, inheritances or loans. This theory also contemplates that any expenditures by the person of cash or currency from funds not deposited in any bank and not derived from a non-taxable source, similarly raises an inference that such cash or currency represents taxable income.
Because the 'bank deposits method' of proving unreported income involves a review of the person's deposits and cash expenditures which came from taxable sources, the Government must establish an accurate cash-on-hand figure for the beginning of the tax year. The proof need not show the exact amount of the beginning cash-on-hand so long as it is established that the Government's claimed cash-on-hand figure is reasonably accurate.
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