The usual strategy is for the Government to produce evidence of the receipt of specific items of reportable income by the defendant that do not appear on his income tax return or appear in diminished amount. ( United States v. Horton).

There are several ways, both direct and indirect, that the government can prove there’s been an understatement or failure to report of taxable income.

One way is through “specific items.” Another is by the “Net Worth” method. Basically, this technique involves the process of deduction. Here’s how the Supreme Court of the United States explained the “Net Worth” method in a leading case that approved its use:

In a typical net worth prosecution the Government, having concluded that the taxpayer’s records are inadequate as a basis for determining income tax liability attempts to establish an “opening net worth” or total net value of the taxpayer’s assets at the beginning of a given year. It then proves increases in the taxpayer’s net worth for each succeeding year during the period under examination and calculates the difference between the adjusted net values of the taxpayer’s assets at the beginning and end of each of the years involved. The taxpayer’s nondeductible expenditures, including living expenses, are added to these increases, and if the resulting figure for any year is substantially greater than the taxable income reported by the taxpayer for that year, the Government claims the excess represents unreported taxable income. ( Holland v. United States). more