How can you prove a deposit you made is nontaxable?

[Idk Wid]

I'm wondering how an individual would be able to prove "income" as nontaxable in the event they were being audited?  For example, gift money.  

In a more complex example, let's say I made an ATM withdrawal of $200 to loan to a friend last year. He then pays me back and I want to deposit it back into my account this year.  Also, my wife(whom I filed jointly with and had the tax return sent to her bank account) gives me $300 from our tax return we that we received last year, and I want to deposit this into my account at the same time.

How could I prove this $500 that I'm depositing is not taxable income?

[Carl]

What reason would any taxing authority have to claim the deposit was taxable in the first place?  There has to first be a reason for them to think it's taxable income.

[VolvoGirl]

They don’t see your bank deposits.  They just get your tax returns.  They don’t care about your bank or individual transactions.

[Carl]

I can only see this occurring if someone uses something like Google Wallet, not realizing that's for business and all deposits to the google wallet are reported on a 1099-K to the IRS.

[AnnetteB · Accepted solution]

Speaking from the perspective of past experience working with a client being audited for income and deposits that were made into a bank account, the answer to your question will greatly depend on the auditor assigned to work on your case. 

If there are any transactions in question that can be backed up by any type of documentation showing that the deposit was not “income”, then show that documentation whenever possible.  The auditor may or may not accept it as proof. 

For the example you gave regarding taking part of your tax refund from your wife’s account and depositing into yours, show both the withdrawal from her account and the deposit into yours.  Your other example would be tougher to substantiate. 

Going forward, it is best to have separate accounts for personal transactions and business transactions.  If everything is in one account, the auditor has to assume that all deposits are income of some sort.

[Carl]

Had a user not to long ago that was using Google Wallet for personal reasons not realizing it was intended for business reasons. Friends would put money in the wallet so the friend could buy things online for them on their behalf. Was shocked with they got a 1099-K from Google for more than $30 of "income" deposited to the account. Since the IRS has a copy of that same 1099-K, they now have a mess and as far as the IRS is concerned all that money is business income and taxable, unless they can prove otherwise. Just hope this person has all their receipts for the things they purchased and "sold" to the individuals that gave them the money for that purpose.

[Idk Wid]

Thank you for your responses.  I hope it's okay to ask follow up questions.  While the auditor may choose not to accept it, I assume showing the receipt/statement of my wife's withdrawal and that of my deposit would be as much as I could do in that example.  They would probably be hard pressed to accept it if the transactions are a year apart though.

In the case of loaning money and redepositing it when I get paid back, would a signed letter from the other person serve as evidence that I didn't receive that money as income?  The problem I see in proving this is with the authenticity of that letter.  Is there anything else that would substantiate my claim here?

I'm jyst trying to cover my bases, should I ever be selected for an audit.

[Carl]

Basically look at it this way. If you can't convince a federal judge it happened the way you say things happened, then it didn't happen the way you say it happened. If you loaned money you should have a written agreement that would be legally recognized in your county court, so that you could enforce the terms of the loan if it came to that. It's my suspicion you're posting here on hypothetical situations because you don't want to reveal what you are really doing. Makes me suspect something that may not be legal and you know it. We are not lawyers. You may find it better to seek the services of an attorney, or even a tax attorney since in many cases an attorney is bound by client-attorney privilege.

[Idk Wid]

That's a pretty good way to think about it. And I assure you I've done nothing wrong or illegal.