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When a taxpayer doesn't maintain adequate financial records, the IRS can use an alternative method to calculate the taxpayer's income and determine whether it was underreported.
NEW CASE * The IRS used an indirect method to calculate the income that Charles Y. Choi and his wife, Jin Yi Choi, earned from their Arizona grocery store. The IRS determined that the couple had underreported their income on their 1991 and 1992 federal tax returns. The Chois appealed that Tax Court decision, as well as the imposition of a civil fraud penalty. The Appeals Court affirmed the Tax Court's decision [Charles Y. Choi and fin Yi Choi v. Comm'r of Internal Revenue, U.S. Court of Appeals 9th Circuit, filed August 10, 2004].
Both parties agree that, since the Chois did not maintain adequate records for their grocery store, the IRS was entitled to use an …