Chapter 6

To prove unreported or fraudulently obtained income you can use either direct or indirect methods. Direct methods (or transactional methods) involve probing missing income by pointing to specific items of income that do not appear on a tax return. Typically, conventional auditing methods are used to locate unreported income under a direct method approach. Indirect methods, on the other hand, use economic reality and financial status techniques in which the taxpayer’s finances are reconstructed through circumstantial evidence. These methods may be used independently or together to reconstruct the income of a fraudster.