In the Tax Court case of Edgar Brown, several claimed expenses were addressed by the court. We will look at two of them, unreimbursed employee expenses and the home office deductions that were claimed by the taxpayer. The court’s finding was that it agreed with the IRS’s disallowance of these deductions. Let’s look at why the taxpayer lost.
Mr. Brown was a financial services professional who claimed unreimbursed automobile, tolls, parking and publication expenses that were denied by the IRS. To claim unreimbursed employee expenses, the employee must have been (1) required by the employer to incur such expenses AND (2) the employer did not reimburse the employee. With respect to the second test, the IRS and courts require proof that the employee requested reimbursement from the employer. In other words, if the employer’s policy is to reimburse the employee for such expenses and the employee fails to request reimbursement, no tax deduction is allowed.
It has been our experience that it is rare that an employee can meet both tests as employers generally reimburse employees if they are required to incur expenses on behalf of the employer. Mr. Brown was not able to produce a copy of his employer’s written reimbursement policy nor was he able to corroborate his testimony about his employer’s unofficial reimbursement policy. The court was thus unable to make a finding as to which of the expenses were eligible for reimbursement by the employer and thus all such expenses were denied as tax deductions.
Lesson Learned: Always maintain a copy of the employer’s employee reimbursement policy and if the employer requires that the employee incur expenses on behalf of the employer and does not reimburse the employee, get a letter from the employer verifying this.
The court also found that Mr. Brown was not entitled to a tax deduction for expenses of maintaining a home office. Employees must pass two tests to claim a home office which Mr. Brown did not satisfy. First, he failed to demonstrate or prove that any portion of his house was regularly and exclusively used for business purposes. Second, he failed to produce any evidence that his employer required him to maintain the home office to perform his duties properly. This second test denies the home office deduction for employees who find it more convenient to work from home. If the employer allows the employee to work from home, but does not require it, the employee is not eligible to claim the home office.
Lesson Learned: If you are an employee who maintains a home office, ALWAYS obtain written evidence from the employer stating that the employer requires the employee to maintain a home office to perform his/her job duties.
For his creativity, Mr. Brown as liable for the negligence penalty because he failed to make a reasonable attempt to keep adequate books and records or to substantiate items properly. Further, the taxpayer did not consult with a professional adviser or conduct research before preparing his income tax return. Moreover, the taxpayer’s explanation that he mistakenly submitted an incorrect version of his Form 1040 did not demonstrate that he exercised due care in the preparation of his return.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, or need tax representation before the IRS, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
