As a general rule, all income “from whatever source derived” is taxable. Some taxpayers, however, fail to report some or even all of their income. Some taxpayers do so because of an oversight or misunderstanding of tax rules; others because they choose not to report their income. Underreported income is particularly problematic with those in cash businesses. The IRS has the authority to reconstruct income when it has not been reported.
The IRS uses various methods of reconstructing income, including:
Bottom line: The IRS’s reconstructed income may be more than a taxpayer’s actual income.
Source: Carol Trescott; T.C. Memo. 2012-321
A tax technique for receiving a refund of back taxes by applying a deduction or credit from a current tax year to a prior tax year. For example, a business net operating loss may be carried back for two years.