The alternative source argument is the principal way a taxpayer rebuts a net-worth or other indirect-income assessment. The net-worth method presumes that any unexplained increase in a taxpayer's wealth is unreported income from a taxable source. The taxpayer can defeat that presumption, for a given amount, by proving on a balance of probabilities that the increase came from a specific non-taxable source.
Common non-taxable sources include gifts, inheritances, loan proceeds, the non-taxable portion of capital gains, proceeds from selling personal property, repayment of money the taxpayer had lent, and savings accumulated before the period under review. Every dollar traced to such a source with credible evidence comes out of the assessment.