A man who prepared nearly 2,000 other people's tax returns in a single year couldn't produce a single record to explain his own. That's the irony sitting at the center of Algarawi v. Commissioner, T.C. Memo. 2026-8 — a case that reads less like a tax shelter dispute and more like a cautionary tale about what happens when a "trust me, I know what I'm doing" bookkeeping system meets an IRS bank deposits analysis.
The taxpayer, Jabir Algarawi, ran a real estate brokerage, led a nonprofit refugee resource center, and operated a tax preparation business called Ali Tax Income out of Arizona. In 2020 he prepared 1,294 returns for clients. In 2021, he prepared 1,953. And through all of it, business receipts, alleged charitable donations, and personal money flowed through the same bank accounts with no ledger, no donation log, and no way to tell one dollar from another. When the IRS came calling, that commingling turned into a five-figure income adjustment, an accuracy-related penalty, and a reasonable-cause defense the Tax Court all but laughed off.
For anyone running a small business, a side hustle, or a mission-driven organization, this case is a clean illustration of a rule that sounds abstract until it costs you real money: if you can't prove where the money came from, the IRS gets to decide for you.
What Actually Happened
On their joint returns for 2020 and 2021, Algarawi and his wife, Amira Hachim, reported gross receipts from the tax prep business of $12,548 and $12,458. Those numbers looked low for someone who had just prepared over 3,200 returns across two years, and the IRS agreed. Using a bank deposits analysis — a well-established indirect method of reconstructing income — the agency determined actual gross receipts of $84,678 for 2020 and $106,072 for 2021. That's an underreporting of $72,130 and $93,614 in the respective years, on top of $5,615 in unreported cancellation-of-debt income from Citibank that Algarawi never addressed on either return.
The bank deposits method is exactly what it sounds like: the IRS totals every deposit into every account a taxpayer controls, subtracts identifiable non-income sources (transfers between the taxpayer's own accounts, loan proceeds, gifts that can be substantiated, and so on), and treats what's left as taxable income. Courts have blessed this method for decades precisely because it doesn't require the IRS to prove the source of income — it shifts the burden to the taxpayer to prove that specific deposits weren't income. When a taxpayer has clean books, that's a manageable burden. When a taxpayer has no books at all, it's nearly impossible to meet.
The "I Was Just Holding the Money" Defense
Algarawi's central defense was what tax lawyers call a conduit theory: he argued the disputed deposits weren't his income at all, but charitable contributions he collected on behalf of families in need through Allnation, the refugee resource center he led. Under a conduit theory, if you're genuinely just a pass-through — collecting money from Person A and handing it to Person B without ever exercising real control over it — that money isn't taxable to you.
It's a legally valid defense. It's also one that lives or dies entirely on documentation, and that's where the case fell apart. The Tax Court noted that Allnation had no tax-exempt status and no separate bank account of its own — every dollar allegedly destined for refugee families passed through Algarawi's personal or business accounts, indistinguishable from his tax prep income. When asked to show which deposits corresponded to which charitable payouts, the only evidence Algarawi offered was a handful of letters from community members, written years after the deposits in question. The court's language was blunt: "he offers no evidence tying specific deposits to the ultimate recipients," and without that link, "we cannot conclude on this record that Mr. Algarawi did not have dominion and control over any particular deposits."
That phrase — dominion and control — is the legal test that decides these cases. If you have the practical ability to spend money as your own, the law treats it as your own, regardless of what you privately intended to do with it later. A donation box with a running log, a segregated account, or even a simple spreadsheet mapping deposits to disbursements could have supported the conduit theory. After-the-fact recollections, written when the money is already under IRS scrutiny, generally can't.
Why "I Didn't Get a 1099" Didn't Save Him
The cancellation-of-debt piece of the case is a smaller point but a useful one for anyone who's ever had a card balance settled or forgiven. Algarawi argued he shouldn't owe tax on the $5,615 Citibank wrote off because he never received a Form 1099-C reporting it. The court rejected that outright, citing the well-settled principle that "nonreceipt of a Form 1099 does not convert taxable income into nontaxable income." The information return is a reporting mechanism for the IRS, not a precondition for your tax liability. If a debt is forgiven, the income exists whether or not paperwork ever reaches your mailbox — which is exactly why it pays to track your own liabilities rather than waiting for a form to tell you what happened.
The Penalty the Occupation Made Worse
The IRS also assessed accuracy-related penalties under section 6662(a) for substantial understatement of tax and negligence, and the Tax Court sustained them. Taxpayers can sometimes escape these penalties by showing "reasonable cause" — a good-faith effort to comply despite an honest mistake. Algarawi tried, and the court's response to that argument is the line worth remembering: it noted that the gaps in his proof were especially damaging "given Mr. Algarawi's occupation as a paid tax return preparer."
In other words, being a professional who understands recordkeeping requirements cuts against you when you fail to follow them yourself. A first-time business owner who genuinely didn't know better has a real shot at reasonable cause. A tax preparer who advises thousands of clients on their own filings, while keeping zero books for his own six-figure cash flows, does not. The court also brushed aside late-filed amended returns and a post-trial argument about COVID-era employment tax credits, both rejected as procedurally improper — a reminder that you generally can't fix a recordkeeping problem retroactively once you're already in litigation.
The Rule Underneath the Case
Strip away the specific facts and Algarawi is really about one thing: Internal Revenue Code section 6001 requires every taxpayer to keep books and records sufficient to substantiate their income and deductions. That obligation doesn't disappear because your bookkeeping is informal, because you run a side hustle instead of a "real" company, or because some of the money passing through your hands was earmarked for someone else. Once your personal, business, and third-party funds sit in the same account with nothing separating them, you've handed the IRS a blank check to characterize every deposit as yours — and the burden of proving otherwise falls on you, potentially years after the fact, with memory and goodwill as your only evidence.
This shows up constantly outside the courtroom too. A freelancer who deposits client payments into a personal checking account. A side-business owner who "spots" a friend cash and gets reimbursed through the same account they run their Etsy shop through. A community organizer who collects donations in cash and never logs who gave what. None of these people are doing anything shady — but all of them are one IRS notice away from an Algarawi-style bank deposits reconstruction, where every unexplained deposit becomes taxable until proven otherwise.
Three Habits That Would Have Changed the Outcome
- Separate accounts for separate purposes. Business income, personal funds, and any money you're holding for someone else — a nonprofit, a family member, a friend — belong in different accounts. This single habit would have let Algarawi trace the charitable deposits without relying on memory.
- Contemporaneous records, not after-the-fact letters. A simple log — date, amount, source, purpose — created when the transaction happens carries far more weight than a testimonial written once the IRS is already asking questions. Courts consistently discount retrospective documentation exactly because it can be shaped to fit the story you need it to tell.
- Don't wait for the form. Whether it's a 1099-C for cancelled debt or a 1099-K for a payment platform, your tax liability exists independent of whether the paperwork shows up. Tracking your own income and debts as they happen means you're never caught unreconciled when the information return does — or doesn't — arrive.
Keep Your Books Clean From Day One
The failure at the heart of this case wasn't a clever scheme — it was the absence of a system. Every deposit that couldn't be explained became income, and every year without records made the next year's argument weaker. Beancount.io offers plain-text accounting that keeps a version-controlled, auditable record of every transaction as it happens — the exact kind of contemporaneous trail that turns "trust me" into "here's the ledger." Get started for free and build the paper trail before you need one.