Question

In: Accounting

Which is not an indirect method of reconstructing income of a taxpayer? a. Net worth b....

Which is not an indirect method of reconstructing income of a taxpayer?

a. Net worth

b. Bank deposit

c. Cash T

d. Unreported mark-up

e. None of the above

Solutions

Expert Solution

In order to determine the income of a taxpayer indirect method can be used only if it is established that there is a reasonable indication of under reported or unreported income.

Networth method can be used in order to determine the income of a taxpayer by calculating persons net worth using the balance sheet approach and any unreported or difference from the reported income can be determined.

Bank deposit method can also be used by looking at the funds which is deposited in the bank by the taxpayer during the year as respect to the income which is reported. This method is most likely to be used only when the maximum amount of expense and income is paid or received by bank.

Cash T account can be prepared wherein total cash transaction can be looked into determine any under reported income. In this method total expenses made in cash and total income received in cash is reconcile and hence actual income is determined. This method is suitable only for those transactions which have been occurred mostly in cash.

Unreported markup method can also be used by calculating the actual cost of sales done by the taxpayer and applying markup percentage on it it is appropriately used by similar businesses or competitive businesses. Buy this actual income can be determined and any unreported income can be found.

Therefore all the methods can be used in deconstructing income of a taxpayer therefore the correct option is none of the above.

Therefore the correct answer is E

ekkarill92 answered 1 year ago
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