Summary:
If books are inadequate Internal Revenue Service will determine taxable income taxes.

" How can the Internal Revenue Service prove how much I made?" Count the ways.

There is no limit on the methods the IRS can use to compute income if you don't have adequate records. The courts set two requirements for the IRS: (1) prove taxpayer had some income and (2) use a reasonable technique to estimate the amount. "It's not incumbent upon the IRS to prove the exact amount," one judge said. "It's incumbent upon taxpayer to show that the agency's determination was erroneous."

Estimating income takes a vivid imagination and courts are receptive to innovative methods. Here are a few:

Information from taxpayers' suppliers, customers and banks

• A scrap metal company didn't have records. So the agency contacts three suppliers and uses their numbers to iron out a new income figure to steel away with money for the government.
  
• Based on a General Mills recipe, for every 100 pounds of flour bought, the bakery sold 1,100 bagels. Using the prices the bakery charged, the agency cooks up its own income figure.
  
• A couple who owned a beauty salon drove a new Buick and a new Cadillac, put a swimming pool in their back yard and went on a nice vacation. The IRS adds cash paid for these luxury items and for living expenses to bank deposits. That income figure curls the couple's hair.
  
• A former IRS employee operated a return preparation business and bookkeeping service. The agency surveys clients to check his income's accuracy. After 10 percent of them disagree with the amount he said they paid, the IRS prepares a new income amount for the preparer. It analyzes bank deposits and records including amounts on file folders for clients. This shows he under-reported income.

• A salesman admitted he had commission income, but refused to meet with the agent. The IRS determines taxable income based on Bureau of Labor Statistics reflecting average income.
  
• The Federal Narcotics Bureau sent seized money to the IRS. To justify keeping the money, the agency prepares a dummy return showing the suspect owed taxes in the amount seized.
  

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