If you don't have adequate books and records, the IRS can reconstruct your income using any of several methods.

In the case of Bradley M. Cohen and Kathy A. Cohen (T.C. Memo. 2003-42) the Court said that when a taxpayer fails to maintain these records, the IRS may determine income under the bank deposits method.

A bank deposit is prima facie evidence of income. The bank deposits method of reconstruction assumes that all money deposited into a taxpayer's account is taxable income, unless the taxpayer can show a nontaxable source for the income. The taxpayer could not produce evidence of a nontaxable source for the deposits made to an S corporation's bank.

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