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Simple English definitions for legal terms
cash-expenditure method
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A quick definition of cash-expenditure method:
The cash-expenditure method is a way the government checks if people are reporting all their income for taxes. They look at how much money someone spent on things during a certain time and compare it to how much money they said they made during that time. If the spending is more than the reported income, the government will say that the extra money is taxable income.
A more thorough explanation:
The cash-expenditure method is a technique used by the Internal Revenue Service (IRS) to determine a taxpayer's unreported income. This is done by comparing the amount of money spent on goods and services during a specific period with the income reported for that same period. If the amount spent exceeds the reported income, the difference is considered taxable income.
Let's say that John is a freelance graphic designer who reported an income of $50,000 for the year. However, the IRS notices that John spent $70,000 on various expenses during the same year. Using the cash-expenditure method, the IRS can assume that John's unreported income is $20,000 ($70,000 - $50,000), which would be subject to taxation.
Another example could be a small business owner who reports an income of $100,000 for the year but spends $120,000 on business expenses. In this case, the IRS could use the cash-expenditure method to assume that the business owner's unreported income is $20,000 ($120,000 - $100,000).
These examples illustrate how the cash-expenditure method is used to identify unreported income by comparing reported income with the amount of money spent on expenses. It is important for taxpayers to keep accurate records of their expenses to avoid any discrepancies with the IRS.