The Tax Court upheld IRS practice of using bank deposit reconstruction to determine self-employed internet entrepreneur’s unreported income. Bank deposits are prima facie evidence of income. The taxpayer failed to keep adequate records of his business receipts and other income. All bank deposits were considered regular taxable income without regard to their origin where no other evidence was available.

In the same case, the Taxpayer failed to keep records of payments to Internet uplink service in the amount of $47,000 which was claimed as an expense. The expense was disallowed.

Books and records must be retained so long as the contents thereof may become material in the administration of any tax law. Normally, additional tax must be assessed within three years of the return being filed. This period is extended if there is a “substantial omission” (more than 25%) of gross income. There is no limitation on assessment for false or fraudulent returns.

BUSINESS PRACTICE TIP: Keep your business tax records and substantiation of expenses organized and in a safe place for at least six years after the date of filing the return.