Posted by: AGOSTINO ASSOCIATES | February 18, 2017

AGOSTINO & ASSOCIATES NEWSLETTER -Representing Taxpayers in Tax Controversies Involving the Reconstruction of Income, Expenses & Credits by Frank Agostino, Esq. Caren Zahn, EA, Michael Wallace, EA

AGOSTINO & ASSOCIATES –To download a great article prepared by our very close friends at the Law Firm of Agostino & Associates in Hackensack, NJ ( ), see the Agostino & Associates Newsletter –

Representing Taxpayers in Tax Controversies Involving the Reconstruction of Income, Expenses & Credits by Frank Agostino, Esq., Caren Zahn, EA or Michael Wallace, EA. – The goal of this article is to review the Internal Revenue Code’s record keeping requirements, as well as the methods recognized by the Courts to reconstruct income and expenses.

Audited taxpayers generally ask: How long does a taxpayer keep records that support business income and expense deductions? Is it permissible to discard the records after the three year limitation on assessment (Section 6501) or perhaps the six year statute for fraud (Section 6531)? Or, should the records be maintained until after the 10 year collection period under Section 6502 has run?

The IRS requires that records be retained “so long as the contents thereof may become material in the administration of any internal revenue law.” In other words, best practice is to maintain records until the collection statute expires. International taxpayers maintaining books and records outside the United States must substantiate transactions as if such records were maintained within the United States and follow the same retention requirement period.

This article explains that where a taxpayer’s records are lost, inadequate or untrustworthy, the Court’s have accepted various methods for determining the correct amount of income and expense. These methods involve the development of circumstantial proof, generally through the use of bank deposits, various income/ expense ratios, or volume based analyses. These methods are especially useful to reconstruct a cash intensive business’s income and expenses. Thus, practitioners who work with cash businesses particularly should be familiar with these methods. The methods reviewed in this article are: Source and Application of Funds, Bank Deposit and Cash Expenditure, Markup, and Unit and Volume.

Many tax professionals are uncomfortable preparing income tax returns for taxpayers who deal in cash, especially those who lack receipts to prove their income and expenses. They need not be. The teaching of the cases and Circular 230 is that the goal of all tax professionals is to assist the taxpayer calculate the “correct tax.” Tax professionals representing taxpayers without adequate books and records should familiarize themselves with the rules, regulations and case law applicable to income reconstruction. If you or your client needs assistance with issues involving reconstruction of income or expense records, please contact Agostino & Associates with any questions.


AGOSTINO & ASSOCIATES, with a national practice based in Hackensack, NJ, specializes in tax and tax controversies (civil and criminal), offers in compromise, voluntary disclosures, tax lien discharges, innocent spouse determinations, forfeitures, estate planning and probate, contract and contract litigation. A firm comprised truly great, caring people who want the best for their clients!

For further information, contact Frank Agostino, Esq., Caren Zahn, EA or Michael Wallace, EA.- directly at (201) 488-5400 or visit

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: