Income tax is on income, not the increase in value of your business. There needs to be a realization event to be taxed on the increase in value of your business, like a sale. Any goodwill you build up in your business (=sale price – book value) will be taxed on the way out (taxable gain = sale price – adjusted basis). If your business has value, you can borrow against that – shouldn’t need to state or prove your income. If your business isn’t good collateral then you should have to put up your tax returns to show a steady income stream. If your taking your income in cash and not claiming it as income, you certainly shouldn’t be allowed to count on that to support a higher ltv. You could use cash toward the down payment though.

I wonder if the IRS has considered using stated income statements against taxpayers in actions to recover taxes on unclaimed income. Its a sworn statement, made by the party being prosecuted. I would think the dead beat would be estopped from claiming his income was less. That would be great – might put some of the blame for this loan mess where it needs to be placed.