{"id":1113,"date":"2013-10-02T07:31:10","date_gmt":"2013-10-02T11:31:10","guid":{"rendered":"http:\/\/keysolutions.us\/blog\/?p=1113"},"modified":"2013-10-02T07:31:10","modified_gmt":"2013-10-02T11:31:10","slug":"individual-taxpayer-denied-deductions-irs-imposes-accuracy-related-penalty","status":"publish","type":"post","link":"https:\/\/keysolutions.us\/blog\/individual-taxpayer-denied-deductions-irs-imposes-accuracy-related-penalty\/","title":{"rendered":"INDIVIDUAL TAXPAYER DENIED DEDUCTIONS &#8211; IRS IMPOSES ACCURACY RELATED PENALTY"},"content":{"rendered":"<p>Proper <a href=\"http:\/\/www.keysolutions.us\/svcs_tax.htm\">tax planning<\/a> and <a href=\"http:\/\/www.keysolutions.us\/svcs_tax.htm\">tax preparation<\/a> considerations require that taxpayers substantiate their tax deductions and document them. If these two steps are done, then most tax deductions will be sustained if audited by the <a href=\"http:\/\/www.keysolutions.us\/svcs_irs.htm\">IRS<\/a>. Let\u2019s take a peek at a court case that discusses what happens when substantiation and documentation are lacking (K.D. Humphrey, TC Memo. 2013-198, <a href=\"http:\/\/prod.resource.cch.com\/resource\/scion\/citation\/pit\/DEC59619%28M%29\/LINKTCM?cfu=TAA&amp;cpid=WKUS-TAA-IC\">Dec. 59,619(M)<\/a>).<\/p>\n<p>Kenneth Humphrey claimed as deductions: legal fees incurred in connection with his employment; Medicare taxes, dental care, and the cost of a gym membership as medical deductions; charitable contributions; a home office where utility, Internet and cable expenses were claimed; business expenses such as business gifts, meal and entertainment expenses, auto expenses, cell phone, and computer expenses.<\/p>\n<p>The disallowance of Humphrey\u2019s deductions are <strong><span style=\"text-decoration: underline;\">presumed correct<\/span><\/strong> by the courts since deductions are a matter of legislative grace and <strong><span style=\"text-decoration: underline;\">taxpayers bear the burden of proving that they are entitled to the claimed deductions<\/span><\/strong>. In addition, a taxpayer must keep sufficient records to substantiate the deductions claimed.<\/p>\n<p>Looking at the facts of this case illustrates what the IRS looks at and how taxpayers need to substantiate their deductions. Taxpayers who claim these deductions need to assess their documentation and whether they have sufficient substantiation to claim these deductions. Looking at the facts in this case . . . <!--more--><\/p>\n<ul>\n<li>\u00a0The legal fees were related to Humphrey\u2019s employment and would be deductible as a miscellaneous itemized deduction subject to the 2% AGI floor. The problem was that although Humphrey had carbon copies of checks for such legal expenses, he could not corroborate most of the payments against his bank statements. The payments he could corroborate were less than the 2% limitation. Lesson learned: the IRS may ask the taxpayer to verify the deduction in multiple ways and bank statements showing the deductions are vital.<\/li>\n<li>\u00a0Although Humphrey had carbon copies of check payments to his dental care provider, again he could not corroborate the payments with his bank statements. The gym membership was denied because the cost of the membership did not exceed that which he would normally spend for a gym membership . . . thus there was no medical expense component to this membership. Hmmm . . .\u00a0carbon copies of checks that somehow never cleared the bank.<\/li>\n<li>\u00a0Charitable contributions were denied because for any contribution of $250 or more the taxpayer must substantiate the contribution with a contemporaneous written acknowledgement of the contribution by the donee organization.<\/li>\n<li>\u00a0The home office was denied because Humphrey failed to prove that the home office was for the convenience of this employer.<\/li>\n<li>\u00a0Business gifts are limited to $25 per person per year and the taxpayer must show the cost of the gifts, the dates the gifts were made, descriptions of the gifts, the business purpose of the gifts, and the business relationship between the parties. The business gift deduction was denied.<\/li>\n<li>\u00a0While Humphrey could provide monthly cell phone statements, he failed to meet the substantiation requirements of Code Sec. 274(d). The Tax Court also found that Humphrey was unable to prove that his computer was not used for personal use and his receipts for computer expenses lacked the substantiation requirements.<\/li>\n<li>\u00a0Although Humphrey was able to produce some auto receipts, his auto expenses were denied because he failed to maintain a mileage log book and his records failed to state the business purpose of the expenses. It was also found that he was including his commuting mileage as business mileage.<\/li>\n<\/ul>\n<p>Not only did Humphrey have to pay the IRS additional taxes, interest, and penalties for failure to timely pay, but he was liable for the Sec. 6662(a) accuracy-related penalty which is assessed when the taxpayer\u2019s underpayment of income tax results from negligence or disregard of rules and regulations. He failed to show that he had consulted any professionals before claiming deductions without a reasonable basis, or that his underpayment was due to reasonable cause and good faith.<\/p>\n<p>What was this taxpayer thinking when he took the IRS to court?<\/p>\n<p>N<b>ote: <\/b>Because each individual\u2019s tax situation is different, if you want to learn more about the IRS\u2019s substantiation requirements we invite you to call <a href=\"http:\/\/www.keysolutions.us\/\">610-594-2601<\/a> today to make an appointment at our <a href=\"http:\/\/www.keysolutions.us\/index.htm\">Exton PA CPA office<\/a> to discuss your situation. You can also schedule a consultation at <a href=\"http:\/\/keysolutions.us\/consultation.htm\">Click Here<\/a>. To learn more about various tax and business services, visit <a href=\"http:\/\/keysolutions.us\/svcs_tax.htm\">Tax Preparation Services<\/a> and <a href=\"http:\/\/keysolutions.us\/svcs_acct.htm\">Small Business Accounting Services<\/a><\/p>\n<p><em>Copyright \u00a9 2013 Keystone Financial Solutions, P.C. \u00a0All rights reserved. \u00a0BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Proper tax planning and tax preparation considerations require that taxpayers substantiate their tax deductions and document them. If these two steps are done, then most tax deductions will be sustained if audited by the IRS. Let\u2019s take a peek at a court case that discusses what happens when substantiation and documentation are lacking (K.D. Humphrey, [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[3],"tags":[],"class_list":{"0":"post-1113","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-irs-tax-planning-ideas-tips-news","7":"entry"},"aioseo_notices":[],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9W9tf-hX","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/1113","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/comments?post=1113"}],"version-history":[{"count":5,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/1113\/revisions"}],"predecessor-version":[{"id":1118,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/posts\/1113\/revisions\/1118"}],"wp:attachment":[{"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/media?parent=1113"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/categories?post=1113"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/keysolutions.us\/blog\/wp-json\/wp\/v2\/tags?post=1113"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}