In the U.S. Tax Court case of Chaudry, T.C. Summary Opinion 2015-74, (Dec. 21, 2015), an individual’s claimed unreimbursed employee business expenses were disallowed when audited by the IRS. In addition the taxpayer had to pay the accuracy-related penalty.
Mr. Chaudry had claimed employee expenses of $9,100 and $16,111, respectively, for tax years 2010 and 2011 on his Schedule A. These expenses included business expenses for uniforms, reference books, respiratory equipment, clinical scrubs, professional clothes, seminars, education, laundry, cell phone, parking, tolls, transportation and other miscellaneous expenses. At trial, the taxpayer did not offer any documentary or testimonial evidence to support or substantiate his job-related expenses for the tax years at issue. In addition, he failed to meet the strict substantiation requirements of Code Sec. 274(d) because he did not keep proper books and records. In some instances, section 274(d) requires that more stringent recordkeeping and substantiation requirements be met and that the taxpayer have adequate records or sufficient evidence corroborating his own statement to substantiate expenses underlying the claimed deductions.
In addition to agreeing with the IRS’s findings denying the taxpayer’s expenses, the court found that the taxpayer was liable for the 20% substantial understatement penalty for both tax years. The taxpayer was found negligent in failing to keep and/or present adequate records of expenses underlying claimed deductions and there was a substantial understatement of income tax. Moreover, the taxpayer offered no testimony or other evidence concerning his liability for the penalty and did not claim that his actions were reasonable.
The importance of documenting tax deductions is evidenced by this court case where the taxpayer had no corroborating evidence or substantiation.
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