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NET WORTH METHOD OF PROVING UNREPORTED INCOME
A person's "net worth" at any given date is the difference between his total assets and his total liabilities on that date. It is the difference between what he owns and what he owes (measuring the value of what he owns by its cost rather than unrealized increases in market value).
If the evidence establishes beyond a reasonable doubt that the person's net worth increased during a taxable year, then the person had receipts of money or property during that year; and if the evidence also establishes that those receipts cannot be accounted for by non-taxable sources, then those receipts were taxable income to the person.
In addition to the matter of the person's net worth, if the evidence establishes beyond a reasonable doubt that the person spent money during the year on living expenses, taxes and other expenditures, which did not add to his net worth at the end of the year, then those expenditures also came from funds received during the year; and, again, if the evidence establishes that those receipts cannot be accounted for by non-taxable sources, then those funds were also taxable income to the person (provided, of course, the expenditures were not for items which would be deductible on the person's tax return).
Because the "net worth method" of proving unreported income involves a comparison of the person's net worth at the beginning of the year and his net worth at the end of the year, the result cannot be accepted as correct unless the starting net worth is reasonably accurate. In that regard the proof need not show the exact value of all the assets owned by the person at the starting point so long as it is established that the assets owned by the person at that time were insufficient by themselves to account for the subsequent increases in his net worth.