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For an individual who files a Schedule C or F with their Form 1040, it is possible to prepare a cash transaction account analysis to determine the understatement of income. A cash transaction account analysis is an analysis of all of the cash received by the individual and all of the cash spent by the individual over a period of time, which is usually done for one year at a time. Remember to include credit card and electronic payments in this analysis in addition to cash and checks. The theory of the cash transaction account analysis is that if an individual's expenditures during a given year exceed the reported income for the year, and the source of the funds for expenditures is unexplained then the excess amount represents unreported income.
This is also correct. If I have $25,000 in income, including any sources of payment (cash or checks), and my expenses total $35,000, where did I get the other $10,000 to pay my expenses? This is where an examination of credit card statements needs to be undertaken, in detail. A large amount of the expenses may be charged onto credit cards. Did the owner manage to take ...
This solution explains a cash transaction account analysis for Schedule C or Schedule F filers with Form 1040.