A net worth computation stands or falls on the account data behind each asset and liability. BankXLSX converts years of bank, brokerage, and loan statement PDFs into Excel or CSV with date, description, amount, and running balance in their own columns, so every year-end balance and every personal expenditure traces back to a printed line. Start free, no credit card.
Last updated July 2026
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The net worth method is an indirect way of proving income used when a taxpayer has no adequate books. It measures the change in net worth over a year, then adds back nondeductible living expenses and subtracts nontaxable income. The formula is net worth at year end minus net worth at year start, plus nondeductible personal expenditures, minus nontaxable receipts, equals taxable income. The IRS sets it out in IRM 4.10.4.6.7, and its logic is that an unexplained increase in what you own, plus what you spent to live, has to have been funded by income. Every figure in the schedule traces to an account balance or a transaction, which is why the underlying work is a bank statement extraction.
The formula is one line of arithmetic. Building a defensible balance sheet for each year-end, and a personal living-expense figure that holds up, is where the days go.
Each asset needs its December 31 balance for every year in the period. That balance sits on one statement page per account per year, and there can be a dozen accounts.
The personal expenditures line is built from real spending: card payments, checks, cash withdrawals, and transfers out. Reconstructing it means reading every debit, not guessing a number.
Net worth is assets minus liabilities. Miss a mortgage or line of credit balance at year-end and the increase in net worth is overstated, which overstates income.
If one account has a gap at a year boundary, that year-end column is incomplete and the whole comparison between two years is unreliable.
A gift, an inheritance, a loan draw, or a sold asset funds net worth without being income. Each has to be found in the statements and pulled out of the computation.
The same asset has to be valued the same way every year or the change is an artifact of the method, not real income. Retyped figures rarely stay consistent.
Upload the statements and get the structured rows a net worth schedule is built on.
Each row keeps the printed running balance, so the December 31 figure for every account is a statement line, not a reconstruction.
Withdrawals, card payments, checks, and cash come out as dated rows, so the personal expenditures line is built from actual spending.
Bank, brokerage, and loan statements land with identical columns, so assets and liabilities stack into one sheet per year-end.
Older paper statements are usually image-only. OCR tuned for statement layouts reads them instead of returning blank rows.
Dates parse as real dates, so a balance-by-year and expenses-by-year pivot is one table instead of a manual tally.
256-bit encryption in transit, deletion on your schedule, and no reselling or sharing of uploaded financial data.
Nothing to install and no credit card to start.
Upload bank, brokerage, and loan statements for each account across the whole period, including the year before the first audit year so you have a starting point.
Tip: The base year sets the opening net worth. Without a clean starting balance the first year of income is unprovable.
Pull each account December 31 balance into an assets column and a liabilities column, then add non-account assets like real estate and vehicles at cost.
Tip: Value each asset the same way every year so the change reflects income, not a change in method.
Total personal living expenses from the withdrawals, then subtract gifts, inheritances, loan proceeds, and asset sales you can document, and compare the result to reported income.
Tip: Document the source of every nontaxable adjustment while the statement row is still in front of you.
Anyone who has to reconstruct income where the books are missing or not believed.
Rebuild the government net worth computation to find the base-year error, the double-counted asset, or the nontaxable source the agent left out.
Quantify hidden income in fraud, divorce, and shareholder disputes by showing that lifestyle and asset growth outran reported earnings.
Test a special agent net worth case line by line, since the method is a staple of criminal tax proof and a base-year weakness can undo it.
Reconstruct income for a client with destroyed records, or check the examiner figures before conceding a deficiency.
The computation itself is short. The work is assembling a believable balance sheet for two or more year-ends and a personal expenditures figure that traces to spending.
| Line | Item | Where it comes from |
|---|---|---|
| 1 | Net worth at end of year | Total assets minus total liabilities at December 31. |
| 2 | Less net worth at start of year | The same balance sheet one year earlier. |
| 3 | Equals increase in net worth | The change the method has to explain. |
| 4 | Plus nondeductible living expenses | Personal spending funded during the year. |
| 5 | Less nontaxable receipts | Gifts, inheritances, loan proceeds, nontaxable asset sales. |
| 6 | Equals corrected taxable income | Compared against income reported on the return. |
IRM 4.10.4.6.7 describes the examiner version, and 4.10.4.6.7.3 gives the formula. The theory is simple: an increase in what you own, plus what you spent to live, minus money that came from a nontaxable source, must have been funded by income. The document you actually build is a balance sheet for each year-end and a schedule of personal expenditures, and both are spreadsheets of statement figures.
These are the two indirect methods practitioners meet most often, and they answer different weaknesses in the records.
| Net worth method | Bank deposits method |
|---|---|
| Measures the change in assets less liabilities | Measures money flowing through the bank |
| Needs a clean base-year balance sheet | Needs every deposit for the period |
| Works when income was spent or invested, not banked | Works when most income passed through accounts |
| Strong for asset accumulation and lifestyle cases | Strong for service and cash-deposit businesses |
Examiners often run both and reconcile them. If you are answering one, you usually have to be ready to answer the other, and both draw on the same converted statement data.
The defense is almost always in the details of the schedule, not the arithmetic.
Once the balances and expenses are rows, the rest is ordinary spreadsheet work. Many engagements run this alongside the deposit side, the bank deposit analysis, and reconcile the two. If the matter is an IRS collection or examination, the same data feeds the bank statement converter for tax resolution and Form 433. In fraud and marital cases, pair it with forensic accounting bank statement analysis and divorce financial disclosure. Start from the source documents with the bank statement converter, use running balance extraction for year-end tie-outs, and speed the spending build with transaction categorization.
Firms that run these engagements repeatedly automate the intake rather than the analysis. Once the figures are reconciled you can turn them into presentation-ready financial statements without rekeying, and teams handling the rest of a client document set at volume extract it with enterprise document OCR.
It is an indirect method that measures the change in a taxpayer net worth over a year, then adds nondeductible living expenses and subtracts nontaxable income. An unexplained increase in assets over liabilities, plus what was spent to live, is treated as income unless a nontaxable source explains it.
Net worth at year end minus net worth at year start equals the increase in net worth. Add nondeductible personal living expenses, then subtract nontaxable receipts such as gifts, inheritances, and loan proceeds. The result is corrected taxable income, compared against the income reported on the return.
The net worth method fits when income was spent or invested rather than run through a bank, or when assets grew faster than reported income. The bank deposits method fits when most receipts passed through accounts. Examiners frequently develop both and reconcile them.
The starting net worth sets the floor for every later year. If opening assets are understated, for example by missing a cash hoard or an existing account, the increase in net worth is overstated and so is income for every year that follows. Attacking the base year is a core defense.
Gifts, inheritances, life insurance proceeds, loan and line of credit draws, and the nontaxable portion of an asset sale all increase net worth or fund spending without being income. Each one you can document comes off the computation, so tracing them in the statements is the heart of the defense.
At least the base year plus each year under examination, so a three-year case needs four year-ends of data. Because balances at a single date drive the schedule, you need statements that cover every account at each December 31 in the period, plus the year before it starts.
No. It converts bank, brokerage, and loan statement PDFs into accurate Excel or CSV rows with dates, descriptions, amounts, and running balances so the balance sheets and expense schedules can be built and defended. Valuing assets, classifying receipts, and reaching conclusions remain the work of the CPA, EA, or attorney.
Yes. It is one of the classic methods of proof in criminal tax investigations, and courts have upheld convictions built on it. That is exactly why the base-year balance, the treatment of nontaxable sources, and the living-expense figure are litigated so closely.
The deposit side of the same problem.
The funds-flow sibling method.
Income averaging for IRS Form 433.
Trace hidden and diverted funds.
Year-end balances that tie out.
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