Warning
Info
Warning
Info
Simple English definitions for legal terms
net-worth method
Read a random definition: immediate intent
A quick definition of net-worth method:
The net-worth method is a way the government figures out how much money someone made in a year when they didn't keep good records. They look at how much the person's total worth changed over the year, and use that to figure out how much money they made. They also take out any money that doesn't count as income and any expenses that can't be deducted.
A more thorough explanation:
The net-worth method is a procedure used by the Internal Revenue Service (IRS) to determine the taxable income of a taxpayer who does not keep adequate records. This method calculates the change in net worth for the year, which determines the taxpayer's gross income, after taking into account nontaxable receipts and nondeductible expenses.
Let's say John is a freelance graphic designer who did not keep track of his income and expenses throughout the year. The IRS can use the net-worth method to determine his taxable income. If John's net worth increased by $50,000 during the year, the IRS would assume that this increase came from taxable income. However, if John received a gift of $10,000 from his parents during the year, this amount would be considered nontaxable and would not be included in his taxable income calculation.
Another example could be a small business owner who did not keep track of their income and expenses. The IRS could use the net-worth method to determine their taxable income by calculating the change in net worth for the year.
Overall, the net-worth method is a way for the IRS to estimate a taxpayer's income when they do not have adequate records. It is important for taxpayers to keep accurate records to avoid having the IRS use this method to determine their taxable income.