If you ever asked yourself why your tax professional provides you with a tax organizer and requires certain documentation from you to prepare your income tax returns, the case of G.F. Roy (TC Summary Opinion 2016-77) provides a good glimpse of the importance of having the proper documentation to substantiate tax deductions.
A consultant was denied Schedule C deductions by the IRS for car and truck, depreciation and legal service expenses related to his business. In addition, he was found liable for an accuracy-related penalty. Why? He failed to substantiate his claimed expenses.
Taxpayers are required to maintain a contemporaneous mileage log book showing beginning mileage as of January 1 and ending mileage as of December 31 of the calendar year, date of each business related trip, miles driven, and business purpose of each trip. Instead of providing this detailed information, the court found the taxpayer’s one-page summary as insufficient evidence because he failed to provide the required details. Further, the taxpayer failed to meet the additional substantiation requirements of Code Sec. 274 and was denied his claimed car and truck expenses under the standard mileage rate or otherwise. Further, the taxpayer was not entitled to a depreciation expense deduction for the vehicle he claimed he used in his trade or business. The taxpayer provided no credible evidence to show that he used the vehicle strictly for business purposes and it was very unlikely that he did not use it for occasional personal excursions. Moreover, the taxpayer’s self-serving testimony did not meet the strict substantiation requirements.
In addition to being denied his auto expense, the taxpayer was denied a deduction for legal expenses as he provided no direct evidence that the alleged expenses were related to his trade or business or the production of income. Further, the taxpayer failed to show that his legal expenses were covered by attorney-client privilege or any other privilege or that any special circumstances existed to prevent him from substantiating his legal services expenses. Finally, the taxpayer was liable for an accuracy-related penalty due to a substantial underpayment. The taxpayer offered no persuasive argument or evidence to show that there was reasonable cause for the claimed deductions and that he acted in good faith with respect to the underpayment.
Moreover, the court noted that the taxpayer failed to demonstrate that he provided his return preparer with all the relevant information regarding his tax liability and that the return preparer was competent, or that he sought specific advice from the return preparer regarding the Schedule C deductions.
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