What Is an IRS Block Period Assessment?

The term “block period assessment” refers to an obsolete Internal Revenue Service (IRS) procedure once used to address significant undisclosed income discovered over multiple years. This process, which consolidated several tax years into a single assessment, was replaced by a new framework in 2003. Today, assessments resulting from a search or seizure are handled differently, though they still serve to assess tax on hidden income uncovered through serious investigations.

Under the current system, the IRS does not group years into a single “block.” Instead, when a search uncovers evidence of concealed income, the agency conducts separate but consolidated assessments for each of the six tax years immediately preceding the year of the search.

Events That Trigger a Special Assessment

A special assessment following a search is not a routine action and is initiated by specific, serious events that suggest a pattern of concealed income. The most common trigger is a search and seizure operation conducted by law enforcement or IRS Criminal Investigation (CI) agents. During such a search, agents may uncover evidence like parallel sets of books, hidden bank accounts, or records of transactions that were never reported on any tax return.

The evidence found does not need to be a formal set of accounting records. It can include diaries, ledgers, computer files, or other documents that detail a consistent stream of undisclosed income. For instance, discovering a logbook that tracks cash payments received over five years would strongly indicate a long-term scheme to evade taxes.

Information from third-party sources can also lead to such an assessment. An informant, such as a disgruntled former employee or business partner, might provide the IRS with detailed information about a taxpayer’s hidden assets or income-generating activities. Similarly, evidence uncovered during an unrelated investigation could reveal a pattern of tax evasion that warrants this type of consolidated assessment.

The Assessment Process

Once the IRS initiates this process, it will look at the six tax years immediately prior to the year the search was conducted. For example, if a search takes place in 2025, the IRS will open assessments for tax years 2019 through 2024. A separate assessment is made for each of these years, rather than combining them into a single period.

Because taxpayers in these situations often have incomplete or falsified records, the IRS must use indirect methods to reconstruct the taxpayer’s income for each year. One common technique is the “net worth method.” With this approach, agents calculate the change in the taxpayer’s net worth for each year, and any increase that cannot be explained by reported income or other legitimate sources is treated as undisclosed income.

Another method is the “bank deposit analysis,” where the IRS scrutinizes all deposits made into a taxpayer’s known and newly discovered bank accounts. Agents will total all deposits for a given year and then subtract any legitimate, non-income sources, such as gifts or loans. The remaining amount is presumed to be taxable income. The “expenditures method” is also used, where the IRS documents all of the taxpayer’s spending and compares it to their reported income.

In these cases, the initial burden of proof in civil fraud cases rests with the IRS. The agency must prove fraud by “clear and convincing evidence,” which is a high legal standard. If the IRS successfully meets this burden, the responsibility may then shift to the taxpayer to provide documentation that contradicts the agency’s calculations and proves the assessment is incorrect.

Computation of Tax and Penalties

The undisclosed income is assessed for each of the six years separately, and the tax is calculated based on the specific tax rates and rules that were in effect for that particular year. The taxpayer’s ability to claim deductions or losses against the undisclosed income is severely restricted.

The IRS will generally disallow any claimed expenses unless the taxpayer can provide clear and convincing evidence that the expenses were directly related to the generation of the now-disclosed income. For example, if the undisclosed income came from a hidden business, the taxpayer would need to produce verifiable records to substantiate any associated business expenses.

These assessments almost invariably include substantial penalties. The most common is the civil fraud penalty, which is 75% of the tax underpayment attributable to fraud. In addition to penalties, interest is charged on the unpaid tax from the original due date of each respective tax year, which can significantly increase the total amount owed.