30.00 SPECIFIC ITEMS

Updated June 2001

30.01 GENERALLY

30.02 UNREPORTED INCOME -- OVERCOMING

30.03 UNREPORTED INCOME -- IDENTIFIED

30.04 FAILURE TO REPORT BUSINESS 

30.05 OVERSTATED DEDUCTIONS OR EXPENSES

30.05[1] Generally

30.05[2] Individuals and Businesses

30.05[3] Return Preparers

30.06 DEFENDANT'S ADMISSIONS

30.06[1] Generally

30.06[2] Dummy Returns

30.06[3] Delinquent Returns

30.06[4] Timely Filed Returns

30.07 NO BURDEN TO FOLLOW REASONABLE LEADS

30.08 PROPER CHARACTERIZATION OF METHOD OF PROOF

30.09 CRIMINAL COMPUTATIONS

30.09[1] Method Of Accounting

30.09[2] Proper Income Allocation

30.09[3] Treatment of Known Deductions

30.10 USING MULTIPLE METHODS OF PROOF

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                         30.01 GENERALLY

      The specific items method of proof is a direct method of proof used to 

establish unreported income.  This method of proof differs from the indirect 

methods of proof (net worth, bank deposits, and expenditures) in that it 

focuses on specific financial transactions and does not attempt to 

reconstruct the defendant's overall financial situation.  The specific items 

method primarily relies on direct evidence, although circumstantial evidence 

may also be introduced. [FN1]  By contrast, the indirect methods generally 

rely on circumstantial evidence to prove an understatement of income.  Using 

the indirect methods of proof, the government shows "either through 

increases in net worth, increases in bank deposits, or the presence of cash 

expenditures, that the taxpayer's wealth grew during a tax year beyond what 

could be attributed to the taxpayer's reported income, thereby raising the 

inference of unreported income." 

United States

 v. Black, 843 F.2d 

1456, 1458 (D.C. Cir. 1988).  The government often resorts to indirect 

methods of proof when the defendant deals in cash and has maintained 

inadequate records from which to reconstruct income. 

      The advantages of the specific items method of proof are that it is 

easy for the prosecutor to present and for the jury to understand, it 

generally involves less evidence and has relatively simple criminal 

computations compared to the indirect methods, and the government does not 

have to follow all of the technical requirements of the indirect methods of 

proof.  The objective of the specific items method is to prove that a 

defendant earned more money than is reflected on the defendant's tax 

returns, or that  reported deductions, expenses, or credits are either 

nonexistent or overstated.  Both testimonial and documentary evidence may be 

introduced.  This evidence may include admissions of the defendant, the 

defendant's books and records, bank records, the testimony of inside 

witnesses (e.g., the defendant's employees and ex-spouse), testimony 

and documentation of witnesses engaged in the transactions which have been 

reported inaccurately, and the testimony of the defendant's accountant.  

      There are four general categories of specific items cases:

      1.    Unreported income, where the evidence establishes that the total 

            amount of income received is greater than the amount reported;

      2.    Unreported income, where the evidence establishes that 

            identified items of income were not reported;

      3.    Failure to report a business or other source of income; [FN2]

      4.    Overstated deductions or expenses, including fictitious 

            deductions and legitimate deductions that are inflated.

      Generally, specific item cases will deal with income rather than 

deductions or expenses.  The government usually attempts to produce evidence 

that the defendant received income, which was either not reflected at all on 

the return or which was underreported.  

United States

 v. Marabelles, 

724 F.2d 1374, 1377 n.1 (9th Cir. 1984); United States v. Horton, 526 

F.2d 884, 886 (5th Cir. 1976).  See also 

United States

 v. 

Genser, 582 F.2d 292, 295-96 n.1 (3d Cir. 1978); 

United States

 v. 

Allen, 551 F.2d 208 (8th Cir. 1977); 

United States

 v. Bray, 546 

F.2d 851, 856-57 (10th Cir. 1976).

      As a practical matter, there are four basic steps to developing a 

specific items case involving unreported income:  (1) proving that the 

relevant amounts are taxable income to the defendant; (2) proving the income 

was received by the defendant; (3) proving the income was not reported; and 

(4) showing the defendant's personal involvement in the failure to report 

the income and in the disposition of the unreported income, i.e., 

willfulness.

      While the government must show that the defendant received unreported 

taxable income, it need not show how the defendant spent the money after it 

became his or her income.  

United States

 v. Martin, 525 F.2d 703, 707 

(2d Cir. 1975).

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30.02 UNREPORTED INCOME -- OVERCOMING AMOUNTS REPORTED ON RETURN

      In this type of specific items case, the proof establishes that the 

total income received is greater than the total reported.  Thus, the 

evidence establishes that the defendant failed to report income by proving 

more income than the amount reported on the return.  It is not necessary to 

show which particular items were not reported.  For example, if the 

defendant reports real estate commissions of $20,000 and the evidence 

establishes real estate commissions of $60,000, then there is $40,000 in 

unreported income.  It makes no difference whether a particular commission 

was reported.  See, e.g., United States v. Marabelles, 

724 F.2d 1374, 1378 & n.2 (9th Cir. 1984) (government proved gross receipts 

from defendant's painting business substantially in excess of reported 

amounts); United States v. Horton,  526 F.2d 884, 886 (5th Cir. 1976) 

(amount of fees testified to by defendant's clients exceeded fees reported).

      The proof required to overcome reported income can be fairly simple.  

For example, one can call witnesses to testify as to the amount of money 

they paid the defendant, add the amounts up, and compare the total to that 

on the return. Although there are a number of cases that lend themselves to 

this approach, it is not always practical.  For example, it would 

impractical to call as witnesses hundreds of a retailer-defendant's 

customers.  Locating enough of the customers to overcome reported income 

would be doubtful at best.  In such a situation, specific items is not an 

available or practical method of proof.  As a rule of thumb, this is usually 

the case where the defendant has reported a substantial gross income and his 

business is such that his income is derived from large numbers of customers, 

any one of whom has only paid the defendant a relatively small amount, and 

there is no available evidence beyond the testimony of the individual 

witnesses, such as books and records reflecting the amounts received from 

customers.

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30.03 UNREPORTED INCOME -- IDENTIFIED INCOME ITEMS NOT ON RETURN

      In this second type of specific items case, the items of income 

reported on the return can be identified and, therefore, any other items of 

income necessarily represent unreported income.  The unreported income may 

include an entire category of income, such as the failure to report any 

capital gains income where there is evidence of capital gains income earned 

during the year. See, e.g., Azcona v. United States, 

257 F.2d 462 (5th Cir. 1958), where the defendant reported only his salary 

from the police department and no other income, and the evidence established 

that he received graft payments.

      This second group of cases also may include situations where the 

defendant has reported some, but not all, of the income in a particular 

category, and the government can identify all of the items that make up the 

reported amount.  Any additional items of income necessarily constitute 

unreported income.

      A common approach in this type of specific items case, where the 

defendant's books and records are obtained, is to reconcile the books and 

records to the return so as to determine which particular items of income 

have been reported.  Any items of income not reflected in the books and 

records necessarily represent unreported income since it has been 

established that the return reports only those income items recorded in the 

books and records. Often the defendant's bookkeeper, office manager, 

secretary, or return preparer are the key witnesses in the case.  The office 

employees can testify as to the office procedures used to record income, any 

instructions given to them by the defendant, and any admissions regarding 

unreported income.  The return preparer can testify regarding the 

information used to prepare the return.  Generally the return preparer has 

been given inaccurate summary documents by the defendant, or incomplete 

records.  If the criminal case began with an examination audit, the Revenue 

Agent may also be called to testify regarding the reconciliation of the 

books and records to the return.  Note that the government is not required 

to verify or corroborate the reported amounts of income.  The government may 

take the defendant's reported income as an admitted amount earned from 

designated sources.  

United States

 v. Burkhart, 501 F.2d 993, 995 

(6th Cir. 1974).  However, the reconciliation of the books and records to 

the return is of great benefit to the government.  If the government can 

prove exactly what was reported and not reported, it lends credibility to 

the government's case.

      The return alone often will lend itself to this type of specific items 

case.  Thus, if the return fails to report any interest income, proof of the 

receipt of interest income will ordinarily establish unreported income.  The 

prosecutor must be wary, however, of the defense that alleged unreported 

items of income were in fact reported, but in the wrong category or on the 

wrong line on the return.  For example, assume the evidence establishes that 

the defendant received $3,000 in interest income and did not report any 

income designated as interest income.  If, however, the defendant reported 

$6,000 in miscellaneous income, and the prosecutor is not able to identify 

the source of the reported miscellaneous income, then the government may 

have no answer to the allegation that the defendant did in fact report the 

$3,000 in interest income as part of the $6,000 reported as miscellaneous 

income.  For this reason, every effort should be made to document the 

source(s) of reported income.

      For other examples of specific items cases involving identified income 

items not reported on the return, see 

United States

 v. Allen, 

551 F.2d 208 (8th Cir. 1977); 

United States

 v. Venditti, 533 F.2d 217 

(5th Cir. 1976); 

United States

 v. Parr, 509 F.2d 1381 (5th Cir. 

1975); Swallow v. 

United States

, 307 F.2d 81 (10th Cir. 1962).

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30.04 FAILURE TO REPORT BUSINESS OR SOURCE OF INCOME

      When an individual receives and does not report income from a business 

enterprise during the course of a year, the specific items method of proof 

can be used to show that the defendant filed a false return or failed to 

file a required return.  Again, the government would have to prove through 

the testimony of "inside" and customer witnesses that the defendant operated 

the business, prove the unreported income through the above witnesses' 

testimony, bank records, and business records, and, if appropriate, show 

that the defendant did not inform his return preparer of the existence of 

the business.       The leading opinion on this type of case is Siravo v. 

United States

, 377 F.2d 469 (1st Cir. 1967).  Siravo reported wage 

income on the tax returns he filed for three of the prosecution years and 

did not file a return for the fourth year. He did not report gross receipts 

from a jewelry company he operated.  Siravo was charged with one count of 

failing to file a return, in violation of 26 U.S.C., Sec. 7203, and with 

three counts of subscribing to a false return, in violation of 26 U.S.C., 

Sec. 7206(1), in that he "failed and omitted to disclose . . . substantial 

gross receipts from a business activity . . . ." Siravo, 377 F.2d at 

471-72.

      As to the false return counts, Siravo argued that the failure to 

attach a Schedule C to his return reporting his gross receipts was not a 

false statement or misrepresentation of his taxable income but merely an 

omission.  Rejecting this argument, the court said:

      [W]e hold that a return that omits material items necessary to the 

      computation of income is not "true and correct" within the meaning of 

      section 7206.  If an affirmative false statement be required, it is 

      supplied by the taxpayer's declaration that the return is true and 

      correct, when he knows it is not.

Siravo, 377 F.2d at 472

      Regarding the failure to file count, the trial court "correctly 

instructed" the jury that total receipts must be reduced by the cost of 

goods sold and other costs representing a return of capital to arrive at 

gross income for a manufacturing business, and that it was sufficient if the 

government showed that receipts exceeded cost of goods sold by at least 

$600.  But there was no evidence as to the amount of costs except some 

testimony that substantially all materials were supplied by the defendant's 

customers.  Siravo, 377 F.2d at 473.  Siravo argued that the 

government did not carry its burden since labor costs are part of the cost 

of goods sold and there was testimony that the volume of business was 

impossible for one man to handle.  Siravo, 377 F.2d at 473.  Holding 

that the government had no such burden, the court said that ". . . [t]he 

applicable rule here is that uniformly applied in tax evasion cases -- that 

evidence of unexplained receipts shifts to the taxpayer the burden of coming 

forward with evidence as to the amount of offsetting expenses, if any." 

Id.

 at 473 (citations omitted).

      Note that if the defendant does come forward with evidence of 

offsetting costs or expenses in a failure to file case involving a 

manufacturing business, then the government would have the burden of 

establishing that the costs and expenses either were not allowable or were 

insufficient to reduce gross income below the level triggering the filing 

requirement.  On the other hand, where the charge is filing a false return, 

as were three of the counts in Siravo, defense evidence as to 

offsetting costs and expenses would not "go to the materiality of the 

omitted receipts, but to the lack of mens rea in their omission."  United 

States v. 

Taylor

, 574 F.2d 232, 237 (5th Cir. 1978).

      In 

Taylor

, the defendant did not file Schedules F for the first 

two prosecution years and filed a false Schedule F which understated his 

livestock receipts for the third year.  The court held that proof of 

unreported gross receipts was sufficient to sustain the conviction, stating:

      [R]equiring the government to prove the omission of gross income comes 

      near to requiring the proof of additional tax liability.  Such a 

      definition of "material" . . . would imperil the self-assessment 

      nature of our tax system.

Taylor

, 574 F.2d at 236.

      In a failure to file case, United States v. Schutterle, 586 

F.2d 1201, 1205 (8th Cir. 1978), the Eighth Circuit held that evidence of 

bonus or commission payments from a corporation to the defendants, as local 

supervisors, was sufficient to establish gross income necessary to trigger 

the filing requirement.  In Schutterle, the government did not prove 

that the defendants actually sold any products, but proved only that the 

defendants received bonuses or commissions based on the volume of products 

purchased, presumably for resale.  In response to the defense that these 

payments from the corporation were merely discounts or rebates on volume 

purchases, the court stated the defendants had performed services for the 

corporation, as local distributors, and the payments were made in 

recognition of these services.  Thus, the payments represented commissions 

and should have been reported.

      In 

United States

 v. Francisco, 614 F.2d 617, 618 (8th Cir. 

1980), the statement that the government has the burden of establishing 

"that gross receipts exceed the cost of goods sold by an amount sufficient 

to trigger the reporting requirements" appears, at first blush, to be 

contrary to Siravo's holding (377 F.2d at 473), that the government 

need prove only gross receipts and not the cost of goods sold.  

Francisco, however, relied on Siravo and the language in its 

opinion merely sets forth the burden on the government and not the evidence 

required to meet this burden.  Thus, the case is not contrary to the 

proposition that once the government establishes gross receipts sufficient 

to trigger the filing requirement, the burden of going forward with 

offsetting expenses is on the defendant.  Note that in Francisco, the 

court did not have to reach this issue since the parties stipulated to 

figures representing total sales less the cost of goods sold, with the court 

holding that the burden of coming forward with any expenses not stipulated 

shifted to the defendant. Francisco, 614 F.2d at 618.

      Contrary to the teaching of the foregoing cases as to the burden of 

producing evidence, the Tenth Circuit in United States v. Brewer, 486 

F.2d 507, 509-10 (10th Cir. 1973), reversed one count of a failure to file 

conviction due to insufficient evidence that the defendant earned enough 

income to trigger the filing requirement.  The court stated that the 

evidence of a $17,000 sale "does not establish anything more than the fact 

that the defendant was a person of some means.   It fell short of 

establishing that any part of these proceeds constituted income".  

Brewer, 486 F.2d at 509. Contra 

United States

 v. Bahr, 

580 F. Supp. 167, 171 (N.D. Iowa 1983), holding that where the government 

establishes the existence of unexplained receipts sufficient to give rise to 

the filing requirement and follows up reasonable leads as to the cost of 

goods sold, then the government has made out a prima facie 

case of failure to disclose gross income and it is up to the defendant to 

establish any offsetting expenses.  See also 

United States

 v.  

Gillings, 568 F.2d 1307 (9th Cir. 1978) (distinguishing Brewer).

      In this vein, care should be taken to frame the indictment so as to 

conform exactly to the evidence to be offered.  If the government can only 

prove the failure to report "gross receipts", then the indictment should 

allege that the defendant failed to report "gross receipts" and not charge 

that the defendant did not report "income."  See, e.g., 

Taylor

, 574 F.2d at 236. 

      An unusual variation on this type of specific items case appears in 

United States

 v. Vario, 484 F.2d 1052 (2d Cir. 1973).  The defendant 

was charged with violating section 7206(1), "in that he had failed to 

disclose the fact that he was engaged in a gambling or 'policy' operation 

which produced gross income for him."  Vario, 484 F.2d at 1054.  The 

government did not attempt to show specific amounts of income the defendant 

received, that he spent more than he reported on his returns, or that he had 

large bank deposits during the prosecution years.  The government only 

sought to establish that the defendant was actively engaged in a gambling 

operation, and that the gambling operation produced income, which the 

defendant failed to report.  The court held that this was sufficient to 

support a jury verdict of guilty under section 7206(1).  Vario, 484 

F.2d at 1054.

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             30.05 OVERSTATED DEDUCTIONS OR EXPENSES

30.05[1] Generally

      Cases involving overstated deductions or expenses fall into categories 

similar to cases involving understatements of income.  In some, the evidence 

will establish specific deductions claimed on a return, to which the 

defendant was not entitled.  In other cases, the evidence simply will show 

that the defendant was entitled to a lesser deduction than that claimed on 

the return. [FN3]

      There are a limited number of cases dealing with false or overstated 

deductions.  Since deductions are subtracted from gross income in arriving 

at taxable income and the tax due and owing, they are material to the 

contents of an income tax return.  

United States

 v. Warden, 545 F.2d 

32, 37 (7th Cir. 1976).  Generally, false deduction cases are proven by 

introducing evidence from the witnesses involved with the defendant in the 

transaction which is the subject of the deduction and comparing the records 

maintained by that witness with records maintained by the defendant.  Often, 

the defendant's bank records prove that the deductions claimed were 

overstated.  Many defendants attempt to support their false deductions by 

altering the amounts of checks or their payee and supplying the checks to 

the IRS, often with other false documentation, i.e., phony invoices, 

receipts, and letters.  Forensic analysis of these items generally 

establishes their falsity with relative ease, particularly in the case of 

checks which have altered amounts.  Most defendants fail to realize that 

when checks are negotiated by the bank, the bank encodes the amount of the 

check on the face of the check, making it easy to determine the actual 

amount paid.  Some false deductions cases, however, entail problems of proof 

which are greater than those routinely encountered in cases involving the 

omission of income, because the government must prove a negative, 

i.e., that the expense was not incurred at all or not in the amount 

claimed.

30.05[2] Individuals and Businesses

      Cases involving individual taxpayers and businesses fall into many 

different fact patterns.  The cases with the greatest jury appeal are those 

in which the defendant has diverted corporate funds to his or her personal 

use and deducted the diversions on the return as some form of corporate 

expenses.  The tax benefit to the defendant in these cases is twofold:  the 

corporation's tax liabilities are reduced because personal expenses are 

improperly deducted as business expenses on the corporate tax returns and 

the individual receiving the corporate diversion reduces his or her 

individual tax liabilities by failing to report the diversions as income on 

his or her individual returns.  This pattern was followed in United 

States v. Helmsley, 941 F.2d 71 (2d Cir. 1991) (corporation's 

expenditures on its owner's personal estate renovation project improperly 

deducted as business expenses); United States v. Black, 843 F.2d 1456 

(D.C. Cir. 1988) (checks drawn on corporate accounts to pay personal 

expenses sufficient to sustain tax evasion conviction); 

United States

 v. 

Garcia, 762 F.2d 1222 (5th Cir. 1985) (defendant improperly claimed 

personal expenses as business deductions); 

United States

 v. 

Greenberg, 735 F.2d 29 (2d Cir. 1984) (corporation's payment of its 

owner's personal expenses improperly deducted as business expenses); 

United States v. Nathan, 536 F.2d 988 (2d Cir. 1976) (defendant 

expensed Subchapter S corporation's checks that in fact he cashed for 

himself). 

      

United States

 v. Bliss, 735 F.2d 294, 301 (8th Cir. 1984), 

provides a good example of how to use the specific items method to prove 

that the defendant has claimed false deductions.  The defendant wrote checks 

on his business bank account to a fictitious company, prepared phony 

invoices, and had his employees cash the checks, returning most of the money 

to the defendant.  The government introduced the checks, false invoices 

prepared by the defendant, and the testimony of the employees who admitted 

that the checks were not for purchases claimed by the defendant.  The 

employees also testified that the defendant told them the money generated by 

the scheme was "tax free money" and instructed them to lie to the IRS after 

the investigation began.  The defendant challenged the sufficiency of the 

evidence that he had filed false tax returns. The Eighth Circuit upheld the 

conviction, stating the evidence was "overwhelming."  Bliss, 735 F.2d 

at 301.

      Relatively simple examples of overstated deductions or expenses may be 

found in United States v. Ragen, 314 U.S. 513 (1942) (corporate 

profit distributions (dividends) were falsely expensed on the corporation's 

books and returns as commissions, resulting in an understatement in the 

taxable income and tax liability of the corporation); 

United States

 v. 

Pacheco, 912 F.2d 297 (9th Cir. 1990) (false partnership deductions); 

Spinney v. United States, 385 F.2d 908 (1st Cir. 1967) (dentist 

overstated deductions for dentures, dental supplies, and other professional 

expenses); United States v. Wilkins, 385 F.2d 465 (4th Cir. 1967) 

(defendant claimed $10,000 in deductions, government proved $7,000 were 

fictitious); United States v. Pechenik, 236 F.2d 844 (3d Cir. 1956) 

(corporation's capital expenditures improperly deducted as operating 

expenses, thereby understating taxable income); Eggleton v. United 

States, 227 F.2d 493 (6th Cir. 1955) (defendant overstated costs of used 

cars he purchased for resale); United States v. Berger, 325 F. Supp. 

1297 (S.D.N.Y. 1971), aff'd, 456 F.2d 1349 (2d Cir. 1972) (domestic 

parent corporation improperly deducted expenses of its foreign subsidiary).

30.05[3] Return Preparers

      A large category of specific items cases with false deductions 

involves return preparers who falsely claim itemized deductions or expenses 

for their clients and who are prosecuted under section 7206(2).  As with the 

other false deduction cases, these may include deductions that are totally 

fictitious or legitimate deductions that are inflated.  

United States

 v. 

Damon, 676 F.2d 1060 (5th Cir. 1982) (false Schedules C overstating 

business expenses); United States v. Haynes, 573 F.2d 236 (5th Cir. 

1978) (false itemized deductions); United States v. Warden, 545 F.2d 

32 (7th Cir. 1976) (false itemized deductions).  These cases often involve 

false charitable deductions, child care credits, and business expenses.

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                  30.06 DEFENDANT'S ADMISSIONS

30.06[1] Generally

      The importance of the defendant's admissions cannot be overestimated 

in a tax case.  Admissions regarding income are available from many sources. 

Defendants often boast to friends, spouses, and co-workers that they are 

"cheating on their taxes".  Many defendants leave a paper trail of 

admissions which present a view of their financial situation drastically 

different from that reflected on the income tax returns filed with the IRS.  

For example, most defendants file financial statements with lenders to 

obtain mortgages, loans, credit cards, and credit accounts with retailers.  

In these situations, it is in the best interest of the defendant to portray 

his financial situation as favorably as possible.  Consequently, these 

financial statements can be very helpful in proving that the defendant was 

well aware he had more income than was reported.  

      Often, the most important admissions are those made on the defendant's 

income tax returns.  The government frequently uses admissions made on 

income tax returns (1) which the defendant had prepared but which were never 

filed with the IRS ("dummy returns"), or which were filed delinquently or 

(2) which were timely filed and are used to prove income, deductions, and 

expenses.

30.06[2] Dummy Returns

      Many lenders require that tax returns be submitted with credit 

applications.  Defendants often submit "dummy" returns which have not been 

filed with the IRS and report income substantially in excess of that 

reported to the IRS.  These dummy returns often provide leads as to 

unreported sources of income, as well as income from known sources that has 

been underreported.  Dummy returns are also extremely valuable in proving 

that the defendant acted willfully.

30.06[3] Delinquent Returns

      A rare type of specific items case is one based on the defendant's own 

admissions as to income and expenses, corroborated by independent evidence.  

In a failure to file case, for example, if the defendant has filed 

delinquent returns, which are determined to be correct, the government may 

be able to sustain its burden of proving that the defendant earned 

sufficient income to require the filing of returns by introducing the 

delinquent returns and independent corroborative evidence of the income 

figures reported on the returns. 
United States
 v. 

Bell

, 734 F.2d 

1315, 1317 (8th Cir. 1984).

      In 

Bell

, the defendant was the sole proprietor of a business 

that provided tip sheets to bettors at racetracks.  On appeal, the court, 

relying on United States v. Smith, 348 U.S. 147 (1954), recognized 

that the government cannot prove an essential element of a crime through 

only uncorroborated post-offense extrajudicial admissions of the defendant. [FN4]

The court held, however, that testimony from various witnesses about the 

defendant's sale of tip sheets and receipt of income was "enough 

corroboration to render the income statements on his late-filed tax returns 

admissible."  

Bell

, 734 F.2d at 1317.   See also United 

States v. Marshall, 863 F.2d 1285, 1287 (6th Cir. 1988) (narcotics).

30.06[4] Timely Filed Returns

      The foregoing should be distinguished from the situation in an evasion 

or false return case where the defendant has timely filed returns.  In such 

cases, the government "may take the taxpayer's reported income as an 

admitted amount earned from designated sources" and need not corroborate 

this reported income. 

United States

 v. Burkhart, 501 F.2d 993, 995 

(6th Cir. 1974). Corroboration is not required because the statements in the 

defendant's return constitute pre-offense admissions and pre-offense 

admissions do not have to be corroborated.  Warszower v. United 

States, 312 

U.S.

 342, 347 (1941).  See 

United States

 v. 

Marshall

, 863 F.2d 1285, 1290-91 (6th Cir. 1988) (dissent); United 

States v. Pennell, 737 F.2d 521, 536-37 (6th Cir. 1984) (narcotics and 

firearms); United States v. Soulard, 730 F.2d 1292, 1298 (9th Cir. 

1984) (false income tax returns).

      Similarly, in most cases, the government can rely on the deductions 

and expenses claimed on the defendant's tax return to prove the statutory 

offsets to gross income.  Deductions claimed on a tax return are admissions 

and can be used to make a prima facie case. Fed. R. Evid. Rule 801(d)(2); 

United States

 v. Northern, 329 F.2d 794, 795 (6th Cir. 1964).

      Once the government allows the deductions and expenses claimed on the 

tax return as filed, and any additional deductions the government can 

calculate without the defendant's assistance, the burden of going forward 

falls on the defendant to show any additional allowable deductions not 

claimed on the return. 

United States

 v. Marabelles, 724 F.2d 1374, 

1383 (9th Cir. 1984); 

United States

 v. Lacob, 416 F.2d 756, 760 (7th 

Cir. 1969); Elwert v. 

United States

, 231 F.2d 928, 933 (9th Cir. 

1956); 

United States

 v. Bender, 218 F.2d 869, 871-72 (7th Cir. 1955); 

United States

 v. Link, 202 F.2d 592, 593-94 (3d Cir. 1953). 

See also United States v. Pacheco, 912 F.2d 287, 303-04 

(9th Cir. 1990) (district court did not err in refusing to allow defendant 

to introduce evidence regarding unclaimed deductions where deductions were 

not allowable as a matter of law); United States v. Garguilo, 554 

F.2d 59, 62 (2d Cir. 1977);  

United States

 v. Nathan, 536 F.2d 988, 

991 (2d Cir. 1976)..

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           30.07 NO BURDEN TO FOLLOW REASONABLE LEADS

      In specific items cases, the government has no burden to follow 

reasonable leads provided by the defendant, as it does in indirect method of 

proof cases. United States v. Marabelles, 724 F.2d 1374, 1379 n.3 

(9th Cir. 1984); 

United States

 v. Lawhon, 499 F.2d 352, 356-57 (5th 

Cir. 1974);  

United States

 v. Suskin, 450 F.2d 596, 598 (2d Cir. 

1971); 

United States

 v. Shavin, 320 F.2d 308, 311 (7th Cir. 1963); 

Swallow v. 

United States

, 307 F.2d 81, 84 (10th Cir. 1962); United 

States v. Nemetz, 309 F. Supp. 1336, 1339 (W.D. Pa. 1970), aff'd, 

450 F.2d 924 (3d Cir. 1971).  "[W]here the government's case is based on 

evidence showing specific items of unreported income, the 

safeguards required for indirect methods of proof are not necessary, as the 

possibility that the defendant may be convicted because non-taxable income 

is mistakenly presumed to be taxable income, or because cash expenditures 

are mistakenly assumed to be made from taxable income, is not present.  

United States

 v. Black, 843 F.2d 1456, 1459 (D.C. Cir. 1988) 

(emphasis added.)

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        30.08 PROPER CHARACTERIZATION OF METHOD OF PROOF

      The government must be careful to characterize the method of proof 

properly in cases where unreported income is proven by bank records.  In 

many cases, the unreported income is proven by the introduction of checks 

which the defendant received or converted but did not report on the tax 

return.  If the government can show by direct proof that each check was 

taxable income to the defendant, the method of proof is properly termed 

"specific items."  

      For example, in Black, 843 F.2d 1456, 1459 (D.C. Cir. 1988), 

the defendant wrote checks on corporate accounts for personal expenses.  The 

defendant claimed that these corporate diversions were not taxable income 

but were nontaxable loans.  Although the government's method of proof was 

specific items (the specific items being the company checks diverted for the 

defendant's personal use), the defendant argued that the method of proof was 

actually bank deposits/cash expenditures and that his conviction should be 

reversed because the government did not prove that the expenditures were not 

made with funds from non-taxable sources.  The D.C. Circuit rejected 

defendant's argument even though the expert witness and trial judge referred 

to the method of proof as the "expenditures method." Black, 843 F.2d 

at 1461.  "In the Government's view, Black received taxable income each time 

he wrote a check . . . to cover his personal expenses . . . [and] at no 

point in the trial was it suggested to the jury that evidence of personal 

expenditures, without more, would be sufficient to convict . . . ."  

Black, 843 F.2d at 1459-61. See also 

United States

 v. 

Wilson

, 887 F.2d 69, 77 (5th Cir. 1989) (district court properly refused 

to give bank deposits instruction in specific items case in which proof of 

unreported income was based on the "transfer of specific and substantial 

funds" to defendants' bank accounts). 

      Similarly, direct evidence as to cash transactions could, in some 

circumstances, be a specific item of unreported income.  For example, if 

witnesses testified that they paid the defendant in cash for services, those 

items could be included as income.  The mere deposit of cash into a bank 

account, without direct evidence that the cash was income to the defendant, 

however, would not be sufficient to prove unreported income in a specific 

items case.

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                   30.09 CRIMINAL COMPUTATIONS

30.09[1] Method Of Accounting

      In computing the defendant's taxable income and tax for each 

prosecution year, the government generally is required to follow the 

accounting method used by the defendant.  If the defendant was on the cash 

basis during the prosecution year, then the government's proof also must be 

computed on the cash basis, with income being reported when it is received 

and expenses deducted only in the year they are actually paid.  See 

United States v. Wiese, 750 F.2d 674, 677 (8th Cir. 1984) (a bank 

deposits case which states the general rule that a cash basis taxpayer must 

report income in the taxable year of actual or constructive receipt).  

See also Treas. Reg. § 1.446-1(a)(1) & (c)(1)(i) (26 

C.F.R.).

      Similarly, if the defendant used a hybrid method of accounting, with 

some items treated on a cash basis and other items treated on an accrual 

basis, then the government also must use the same hybrid method in doing its 

computations. 

United States

 v. Marttila, 434 F.2d 834, 837 (8th Cir. 

1970).

      The defendant also is bound to adhere to the accounting method used 

during the prosecution year when preparing computations for trial.  In 

Clark v. United States, 211 F.2d 100 (8th Cir. 1954), the defendant