Skimmed Cash at the Harborview Grill

Start with total deposits: $1,020,000 business + $310,000 personal = $1,330,000. Exclude deposits that are not income: $60,000 loan proceeds are borrowed funds, not income; $15,000 transfers between Ruiz's accounts are merely movements of his own money; the $9,500 returned check was redeposited and does not represent a new receipt. Those exclusions total $84,500, leaving $1,245,500 of income-related deposits. Of that amount, $25,000 is casino winnings, which are taxable but are not business receipts, so business receipts reflected in deposits are $1,220,500. Add $45,000 of cash business expenses paid from undeposited receipts, because the bank deposits method must capture income that never entered a bank account: reconstructed gross receipts are $1,265,500. Reported gross receipts were $1,180,000, so business receipts are understated by $85,500. Adding the unreported $25,000 gambling income gives total additional income of $110,500. One caution: if the $45,000 of cash expenses was already included in the $448,000 cost of goods sold or other deductions, adding it to receipts without adjusting expenses would overstate income; the agent should verify the deduction treatment.

The general assessment period is three years under IRC 6501(a). The six-year period under IRC 6501(e) applies only when the taxpayer omits gross income exceeding 25% of the gross income stated on the return. Here, reported gross receipts were $1,180,000. The reconstructed business omission is $85,500, which is about 7.2% of reported gross income; even adding the $25,000 gambling item yields $110,500, or about 9.4%, still well below 25%. On these figures, IRC 6501(e) is not triggered. Fraud under IRC 6501(c)(1) removes the limitations period entirely, but the government must prove an affirmative act of evasion and willfulness, not merely an understatement. Evidence such as a second set of books, systematic skimming, false entries, or concealment of the casino winnings would support fraud; the current reconstruction alone is not enough. Because the return was filed April 15, 2023, and the investigation began in 2025, the ordinary three-year period had not expired in any event. The six-year argument is weak on these numbers.

The agent should trace the loan proceeds rather than accept the representative's assertion. Obtain the loan check, deposit date, and the brother's bank records; then follow withdrawals from the account that received the loan. Compare the timing and amount of those withdrawals with the dates of the $45,000 in cash expenditures. If the loan was deposited and then spent on identifiable items, it cannot also explain the cash expenses. Interview vendors and employees about how and when they were paid; obtain receipts, payroll sheets, and supplier statements. Review ATM withdrawals and cash deposits around the expenditure dates. Check whether Ruiz had a cash hoard and, if so, whether it existed before the investigation period. The government must negate reasonable nontaxable sources, so the agent should document that the loan was fully accounted for elsewhere and that the cash expenses correspond to unrecorded sales. Corroboration from several independent sources is more persuasive than the reconstruction alone.