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THE SAUGUS ADVOCATE – FriDAy, MAy 16, 2025 Page 19 Sa nr Sa a UNDERREPORTED INCOME T here are several Internal Revenue Service code sections that deal with taxpayers who underreport income. Code section 6001 puts the burden on taxpayers to maintain adequate records in order to verify that all of the taxpayer’s income has been reported and that the proper taxable income figure has been calculated for a particular calendar year. If a taxpayer’s accounting system or method utilized does not clearly refl ect taxable income, under Section 446(b) of the Internal Revenue Code, the IRS has the authority to compute the taxable income using an alternative method. The IRS is given authority to use what it considers reasonable means to determine the taxpayer’s taxable income when the accounting records employed by the taxpayer do not support the income and deductions reported on a particular income tax return. If there is reason to believe that the taxpayer has not reported all of his or her income, the IRS can use an indirect method in order to reconstruct it. The several available methods employed by the IRS are listed in the Internal Revenue Manual and have been supported in several court cases. In a Third Circuit Court of Appeals case, the IRS was able to successfully reconstruct the taxpayer’s taxable income by analyzing bank deposits, cancelled checks, currency transactions, electronic debits, electronic transfers and account credits. Cash expenditures not from deposited funds or nontaxable sources were added to the taxpayer’s income. Deductible expenses that were not claimed on the taxpayer’s original return were, however, allowed as an off set to the unreportnal foundation”. United States v. Janis, 428 US 433, 441(1976). A court may fi nd that the IRS’ reconstruction of the taxpayer’s taxable income is reasonable and the burden of proof is then upon the taxpayer to prove otherwise. I always advise my clied income. This theory of reconstructing income and expenses is supported in the Circuit Court of Appeals case of Calhoun v. United States, 591 F2d 1243, 1245 (9th Circuit, 1978). Based upon the reconstructed taxable income, the IRS assessed the taxpayer an additional income tax representing the defi - ciency as well as penalties for fraud. The Tax Court had originally sided with the IRS and the appeals court affi rmed its decision. The taxpayer must maintain adequate records in order for the IRS to properly be able to determine if the correct taxable income fi gure has been reported. Also supporting this proposition is the case of Agnellino v. Commissioner, 302 F2d 797, 798-99 (3rd Circuit 1962). In this case and in many others, the court had determined that it is indeed the taxpayer’s responsibility to maintain adequate records in order to properly refl ect income. If this is not the case, the IRS is authorized to employ various methods in order to arrive at the correct fi gure. In unreported income cases, it is presumed that the IRS’deficiency determination is correct so long as it is not “without ratioents to report all of their income. It’s very diffi cult to persuade a jury that you simply forgot to report the income. You are much better off being more aggressive with claiming deductions. It would be more likely than not for the deduction to simply be disallowed, unless the claimed deduction was so outrageous as to constitute income tax fraud. Taxpayers should also keep in mind that they may also be able to utilize these same methodologies in order to compute taxable income in the event records for some reason do not exist, such as in the case of being lost due to fi re, storm or other casualty. If there is a material omission of income (25% or more of the taxpayer ’s gross income not being reported on his or her tax return), the statute of limitations is increased from the general 3-year period to a 6-year period. For those taxpayers who choose to not fi le at all, the statute of limitation period for a particular year does not begin to run until the return is actually fi led. It is always best to report all of your income and to fi le a return if required to. In cases where deductions cannot be substantiated, upon audit, you will lose the deduction. Joseph D. Ca taldo is an esta te planning/elder law a ttorney,Certified Public Accountant, Certified Financial Planner, AICPA Personal Financial Specialist and holds a masters degree in taxation. y Senior Seni by Jim Miller Strategies for Paying Off Credit Card Debt Dear Savvy Senior, My husband and I, who are retired, have accumulated about $7,000 in credit card debt over the past few years and need some help paying it off . What can you tell us? Living Underwater Dear Living, I’m sorry to hear about your fi - nancial woes but know that you’re not alone. Credit card debt has become a big problem in this country for millions of older Americans. According to a recent AARP report, 52 percent of adults ages 50 to 64 have credit card debt, along with 42 percent of those ages 65 to 74. Rising costs of basic expenses like food, housing, utilities and health care are the main culprits. But now, new tariff s on products made in China and other foreign countries will make many goods more expensive, which could make this problem worse. Of older adults carrying a balance, nearly half owe $5,000 or more, and nearly a third owe upwards of $10,000. While paying off credit card debt can feel overwhelming, it’s doable with a solid plan and a bit of belt-tightening and persistence. Here are some strategies to help you tackle it: Create a Budget Start by taking a close look at your income and expenses to see where you can free up money to put toward your credit card debt. Also look for areas to reduce spending, such as dining out, entertainment or subscriptions. And see if you’re eligible for any fi nancial assistance programs (see Benefi tsCheckUp.org) that can help boost your budget by paying for things like food, utilities, medicine and health care. Call the Card Company While the average credit-card interest rate is more than 20 percent, some credit card companies may be willing to lower your interest rate or work out a payment plan, especially if you’re struggling. It doesn’t hurt to ask. Pay More Than the Minimum Credit card companies only require the minimum payment, but it’s usually mostly interest. Try to pay more than the minimum every month to make a dent in the principal balance. Choose a Repayment Strategy If you have more than one credit card, pick one and get serious about paying it off . Start with the card that carries the highest interest rate, or the one with the smallest balance. If you focus on paying off the card with the highest interest rate fi rst, you’ll pay less interest over time, saving yourself a lot of money. Once the highest-interest card is paid off , move to the next highest, and so on. Or you may want to start with the card with the smallest balance. Paying off smaller debts quickly can give you a sense of accomplishment and motivate you to keep going. Consolidate Your Debt If you have multiple high-interest cards, look into consolidating your debt with a low-interest personal loan from your bank or credit union. Or consider moving your debts to a balance transfer credit card with 0 percent interest for an introductory period, which is usually 15, 18 or 21 months. This will eliminate the amount of interest you’re paying temporarily. But be careful! Once the introductory promotion ends, the card company will charge interest on any remaining balance. Consider a Debt Management Plan If you need more help, use a nonprofi t credit counseling agency (see NFCC.org) to create a debt management plan for you. At no cost, a counselor will go over your income and debts and determine what’s workable. The counselor will then negotiate with your lenders, to get a payment plan that will lower your interest and monthly payments and maybe forgive some debt. If you accept their negotiated offer, you’ll start making one monthly payment to the counseling service, which will in turn pay the issuers. You’ll likely pay the agency a small fee and give up the cards included in the plan, but over time you’ll be able to pay off your debt. Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org. Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book. nior ior

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