Tuesday, January 31, 2012

The 'On...and Off the Road Again' Case



The code allows for a credit of highway taxes on fuel purchased for off road business use. Taxpayer used highway-legal vehicles that had been modified to become more heavy duty to haul belly-dump trailers for off-road work in the course of their business. The vehicles would travel from job to job around the country on highways, however, taxpayers did keep meticulous records regarding which mileage was on and which was off highway. In cases of mixed use they claimed no credit for any fuel taxes, just to be safe.

Take aways:

• The taxpayers asked the court to consider the truck and trailer together as one vehicle, however, each could still perform their function if attached to another so they were deemed separate. Only the truck part could be evaluated since the trailers on their own can’t consume fuel.

• The code does not consider as off-highway fuel used in a “highway vehicle” that’s registered, or that should be registered, for highway use with an exception for vehicles that has been redesigned for the primary function of transporting a particular load off-highway or which redesigned features substantially limit or impair the transport of such over the public highways.

• When considering the design, only the physical characteristics of the vehicle may be considered – how the vehicle was actually used is immaterial. The fact that a vehicle may be incredibly inefficient on the highway vs. off does not rise to the level of substantial impairment. That would require a vehicle to be too heavy, too high, or too wide for regular use. Also considered are whether such vehicle is subject to the licensing, safety, and other requirements applicable to highway vehicles, and whether such vehicle can transport a load at a sustained speed of at least 25 miles per hour

• The court found that while the vehicles had indeed been customized to be more heavy-duty they were not customized for use to haul one particular material and that while they were modified to be used off-highway, they were not modified to such an extent that they were not still able to be used on-highway.

Friday, January 27, 2012

The 'I wouldn't know what I was looking at' Case



A complicated case with very little that would be relevant to our clients. I did like that the court noted that taxpayer should not blame the preparer when ‘a cursory review of the return should have revealed errors. Even if all data is furnished to the preparer, the taxpayer still has a duty to read the return.’ TP’s regularly comment that they would not know what they were looking at when we ask them to look over a return before we finalize it, however, if you know your salary is around $100k and the wages box reads $30k then please question it! This is the type of thing we are asking you to look for.

It is common for clients to accumulate all tax forms they receive in an envelope which they eventually drop off to us, often without ever looking inside! I recommend first going through the paperwork and comparing it with the organizer we send out to make sure that you did receive everything. This is especially important if you have recently changed addresses. Commonly missing forms are: first year/last year mortgage forms when a refi or HELOC occurred, interest/dividends earned on new bank accounts/investments, 1099-R forms in first year of pension/distribution or for an early withdraw form an IRA/QRP, SS in the first year, W-2/1099, one-off individual stock sales forms for short-term or temp work.

Thursday, January 26, 2012

The 'Guilt by Association' Case



The IRS was able to assess a company’s in-house accountant who was NOT an owner for the unpaid payroll taxes of the company because he; (1) had signature authority on the bank account, (2) signed payroll checks, (3) signed the employment tax returns, and (4) signed checks in payment to other creditors while the employment taxes for those periods remained unpaid. The owner of the company maintained a lavish lifestyle for some period of time but eventually faces bankruptcy and prison and therefore seemed permanently incapable of paying the taxes. The accountant met the definition of a responsible party and therefore could be required to pay them even though he did NOT personally financially benefit and the IRS believed that he was only following the instructions of his employer in order to preserve his job.

Take aways

• The law is clear that any responsible party may be held liable for unpaid payroll taxes. Whenever possible, refuse to be a signed on payroll checks and/or reports for entities you do not own.

• The trust fund penalty amounts to the FICA taxes withheld from employee pay plus related fines. These monies are considered held in trust.

• This is why, even though it may seem cold-hearted, we disengage from clients who we know are not paying their payroll taxes unless they are pursuing/adhering to a payment plan and paying their current patrol taxes in a timely manner.

Wednesday, January 25, 2012

The 'Renter of my Rental is Me' Case



Taxpayer’s income from a commercial rental was recharacterized as active and was not available to be offset by passive losses. This recharacterization was upheld under the self-rent exception to the rule that rental activities are by definition passive activities. (Taxpayer rented the property to his wholly owned corp.)

Take aways:

• Taxpayer had a generic lease but the rents did not correlate to this lease and in some years the rent deducted on the corp did not match the gross rental income reported on the TP’s personal return.

• Because petitioner materially participated in the business activity of the tenant, the self-rental rule would appear to apply. It is a pretty cut and dry case.

• TP relied on the advice and counsel of a paid preparer with a suitable level of knowledge for determining how to characterize the income and therefore were able to avoid the accuracy-related penalty.

Tuesday, January 24, 2012

The 'Just Horsing Around'' Case



Anyone running a business that is something others may list as a hobby can learn a lot from this case! An endeavor (breeding Welch ponies and cobs) that taxpayer’s treated as a business was found to be a ‘an activity not engaged in for profit’ (a.k.a a hobby) and therefore 5 years of losses were disallowed. The court ruled that they were enthusiasts not bona-fide breeders. Taxpayer’s lone sale of a horse in this 5 year period was to a not-for-profit for $500 and they took a charitable contribution of $5000 which they claimed was the remaining value. Expenses were substantial. Over a 10 year time period they claimed almost $840k in losses.

Take aways:

• To prove profit motive, “the goal must be to realize a profit on the entire operation, which presupposes not only future net earnings but also sufficient net earnings to recoup the losses which have meanwhile been sustained.” This throws cold water on the theory that a couple of profitable years will evidence a profit motive in spite of a number of loss years.

• Taxpayers conceded that their research showed that in order to become profitable as horse breeders, given the high boarding costs, they would need to own a facility. Yet, they continued to acquire more horses while incurring very substantial annual losses, suggesting “an indifference to those losses that we are unable to reconcile with an actual and honest objective of making a profit.”

• Activities that have a clear recreational aspect are likely to draw IRS attention when reported as businesses with repeated losses.

• Taxpayers listed a dog on the depreciation schedule and $1100+ in dog expenses. This was cited as evidence of how loosey-goosey the taxpayers were in relation to keeping their personal and business expenditures segregated. They also used a standard pro-ration of 80/20 for everything indicating that everything was estimated.

• The court pointed out that the purpose of keeping business records is not only to “memorialize transactions for tax reporting purposes.” Rather, bona fide business people use these records to help them improve the performance of the business over time. This is part of what is considered when determining whether or not a profit motive exists.

• Someone who is really in the business of breeding horses would keep records about each horse and these taxpayer’s did not. Additionally, although some appreciation of horses was possible, it is inconceivable that they might be enough to recoup the cumulative losses since the start of the business.

• There have been cases where horse ownership was deemed a hobby even when the horses were boarded by the taxpayers.

• Although taxpayers utilized a paid preparer, the court noted that there was no evidence that they either sought or relied on his advice in relation to the appropriateness of their treatment of this activity as a business. (Both seeking and relying on advice of a competent professional are required for any hope of avoiding the accuracy-related penalty on these grounds.)

• Taxpayers depreciated the horses, further negating their claim that they were held for sale. Inventory/stock in trade is not depreciable.

Monday, January 23, 2012

The 'who killed your chances to deduct these losses' Case



Taxpayers were denied six-figure losses from a ranch they owned because they were not active participants in the business venture. They had spent some minimal time on phone calls and had visited the ranch a number of times throughout the year. These visits were deemed to be recreational in nature.(I.e bringing the children, hosting clients/employees of his primary business, etc.) The ranch was in Colorado and they lived in Minnesota. The ranching operation employed a full-time, onsite ranch manager and the court had a copy of the job description which stated he was in charge of all ranch operations.

Take aways:

• Taxpayers needed to establish through meeting one of several tests to prove that they were actively involved in the business in order for the loss to be an ordinary loss which could be used to offset ordinary income. Passive losses can only offset passive income. Passive activities would include rentals and businesses in which the taxpayer does not participate.

• Taxpayer failed to prove that they had spent 500 hours on Stirrup Ranch activities, they engaged in regular, continuous, and substantial activities relating to Stirrup Ranch, or that they materially participated in the activities of Stirrup Ranch.

• Despite claiming to make all the decisions, spend countless hours on phone calls with the ranch manager, and work ‘dawn to dusk’ while at the ranch they did not enter into evidence a log, diary, calendar, or any other record.

• Activities such as (1) studying and reviewing financial statements or reports on operations; (2) preparing or compiling summaries or analysis of the finances or operations of the activity for the individual’s own use; and (3) monitoring the finances or operations of the activity in a nonmanagerial capacity would not count toward time participating in running the business. Those are activities of an investor.

• Taxpayer owned a successful company at which he earned about 6mil/yr. The case made administrative note of the fact that he used that company’s private plane to fly to the ranch. (One wonders if he properly accounted for this personal use!) This served as further evidence that while on trips to the ranch he was conducting his primary business and not ranch business.

• The tax preparer was an attorney, a CPA, and a former IRS agent. The court noted that ‘he should have known better, particularly if he was shown no more evidence and documentation than was shown to us.’ Because of their reliance on his advice they were not hit with the accuracy related penalty. (He also should have known better than to let them go to tax court with no evidence!)

Sunday, January 22, 2012

The ‘Split the Difference’ Case

Taxpayer was an established landlord who owned 6 actively rented properties. In one year he acquired 3 additional properties to rent but wound up selling them before the year was out without ever renting them. He wound up at odds with the IRS because he claimed to be real estate professional eligible to deduct passive losses against ordinary income and because the IRS asserted that the gain on the sale of the 3 never-rented properties was a capital gain not eligible to be netted against passive losses from the operation of the rented properties.

Take aways:

• Taxpayer had an unrelated full-time job which always makes it difficult to prove RE professional status since one of the points to prove is that you spent the majority of your business-related time on the rental business. For those who are rusty at math, this means if you work 2000 hours a year at something else, you need to prove 2001 hours spent on being a landlord.

• The court noted that to carry the burden of proof re: the above point “requires more than a post-event ballpark guesstimate of time committed to participation in a rental activity” and that “his subjective estimate suffers from a lack of contemporaneous verification by records or other evidence.” Really? You show up at tax court empty-handed?

• The Court ruled against the IRS deeming the purchase/sale of the 3 never-rented properties part of the same passive real estate activity as the rental properties thereby allowing the taxpayer to net the proceeds from the sales against the rental losses. TP was able to successfully convince the court that his primary intent when he acquired these properties was to rehab and rent them.

• It is interesting that the IRS tried to characterize these transactions as capital. One wonders whether they would have taken this approach had the properties been held for longer than 1 year prior to the sale, thus making the gains eligible for taxation at a reduced rate.

Saturday, January 21, 2012

The ‘Double Negative’ Case


In this case the taxpayer tried to deduct as a business loss the income he expected to receive but did not receive. His description on the return was: “Cost; Refunded + no income. Bankrupt.” Even though this description made me chuckle, I have to admit that it is not uncommon for people to believe fervently that forfeited or lost income is or should be deductible. For example, performing services (for which they normally charge a fee) for free for a charity. Sometimes the client will list the value of the service with their contributions for their personal returns. I can understand why the tax court felt compelled to explain the same rule 6 ways from Sunday because I am always left with the feeling that, no matter how I explain it, the client is still not buying into the concept.

Take aways:

• Business bad debt deductions for uncollected receivables only apply to accrual based taxpayers because they have recognized income at invoicing. Cash basis taxpayers don’t recognize income until the payment is received. If income is not received it is simply never recognized. You can’t deduct it again as a loss.

• Likewise if you perform a service for free you don’t have to report income for it – period – that’s it - the end

Friday, January 20, 2012

The ‘Any Means ANY’ Case


Taxpayers were both active participants in their employers’ retirement plans yet spouse also made a $5000 IRA contributions and deducted it on the tax return. In fairness, spouse had only contributed approx $200 to employer’s plan. Taxpayer’s income precluded the deductibility of the IRA contribution under the circumstances. Taxpayer tried to claim the $200 as taxable in order to obtain the $5k deduction.

Take aways

• If an employee makes “a voluntary or mandatory contribution to an employer pension plan such employee is an active participant in the plan for the taxable year in which such contribution is made.” Even de minimis participation is sufficient to render a taxpayer an active participant.

• This is another case where taxpayer tried to utilize his/her own rationale vs. the tax laws. The Court must enforce the laws as written and interpreted. “While the result to petitioner seems harsh, we cannot ignore the plain language of the statute and, in effect, rewrite this statute to achieve what would appear to be an equitable result.”

Thursday, January 19, 2012

The ‘Getting the @#$% of the Stick’ Case


The TP definitely gets my sympathy in this case. She attempted to cancel a whole life policy by sending a letter but instead of cancelling, the insurer started loaning the TP the money to pay the premiums because the policy had cash value. After 20 years of this, the insurer seized the cash value to pay off the premium loan. Part of the surrendered cash value was a return of the taxpayer’s own money but part was accrued interest. The interest portion became taxable income when this event occurred. The TP never received the 1099 because the insurance company did not have a current address so she owed not only tax on money she never received (because it was used to pay premiums) but also owed penalties and interest.

Take aways:

• The TP was deemed to have received the interest income and then used it to pay the insurance premiums (a nondeductible personal expense). If the policy had been cancelled in 1988 she would have had taxable income in that year – but also the cash

• Perhaps we need some legislation that prohibits insurance policies from containing automatic loan clauses which enable them to start attaching the cash value as collateral for premium loans without any further paperwork. Until that day – buyer beware. The TP should have followed up and ensured the policy was indeed cancelled.

Wednesday, January 18, 2012

The ‘Relationships Count’ Case


The taxpayer claimed his cousin’s two minor children as dependents for head of household status, exemptions, child tax credit, and earned income credit even though they did not reside with him for the ENTIRE year.

Take aways:

• Unless the children bear one of the relationships to the taxpayer specified by code they must live with the taxpayer ALL year (among other criteria) in order to qualify dependents

• Note: Even when children qualify as dependents, CTC and EIC may be disallowed because the tests for these credits are different than the dependency tests

Tuesday, January 17, 2012

The ‘What is Mine is Yours’ Case


The taxpayer followed the advice of an attorney and organized his dental practice as an LLC with himself, the only generator or revenue, as a 1% owner and another LLC as 99% owner. The 2nd LLC was owned by the taxpayer’s children. In this manner the taxpayer sought to take advantage of the children’s lower tax rates and avoid self-employment taxes.

Take aways:

• Under the assignment of income doctrine, taxpayers may not shift their tax liability by merely assigning income that the taxpayer earned to someone else

• Business entities must have economic substance other than the avoidance of taxes. The 2nd LLC did nothing other than own the 1st LLC which creates a problem.

• If the children were able to perform some service for the business the taxpayer could have employed them and they would have been exempt from FICA charges so some income would have legally transferred to them – of course not hundreds of thousands of dollars of income….

Monday, January 16, 2012

The ‘It’s all Residential’ Case


This court stems from a state issue that is becoming more and more common. Normally unearned income is only taxed in the state of your primary domicile. A number of taxpayers from New York who also have homes in other states (with lower tax rates) attempt to attribute this income to the state where their second home is located. The extent of one’s presence in a state dictates whether or not one is a resident or nonresident. Taxpayers can’t just pick whichever state they prefer. NYS has become more and more aggressive about getting their pound of flesh. In this case the taxpayers reported significant capital gains on a SC return and NY successfully proved they should have been reported on a NY return. Taxpayers were within the time limit to obtain a refund from SC. The federal part of the issue was that the taxpayers did not report the approx $3500 interest the received from SC on the refunds. The taxpayer’s rationale was that they paid approx $7500 in interest to NY so the 2 should be offset.

Take aways:

• You can; apply your own logic to these situations! There has to actually be some legal support for your position.

• The tax code has always treated interest paid and interest received quite differently. All interest income is taxable unless a code section specifically excludes it. Interest paid is only deductible where the code specifies.

Sunday, January 15, 2012

The ‘Woulda, Shoulda, Coulda #1’ Case


Barely into 2012 and we already see vehicle deductions being disallowed. This is a no brainer folks – keep a log or don’t bother fighting the deficiency notice! TP who clearly drove his automobile a substantial number of miles as part of his employment (as a traveling sales person) was denied $19k of unreimbursed employee expenses deductions. Although he provided some contemporaneous records regarding his automobile expenses, they were insufficient to substantiate the number of miles driven and when and where he drove for business. He provided no documentation regarding his meals and entertainment expenses or his nonautomobile expenses and failed to establish the portion of his home which was devoted to his employment.

Take Aways:

• It is a common misconception that if you deduct actual vehicle expenses, it is not necessary to keep a mileage log. This is absolutely incorrect. Another misconception is that if you incorporate you no longer need to keep a mileage log – also incorrect. If you have vehicle use deductions you must have a log: date, business miles driven, and business purpose for the driving - every day (even if it is always the same) plus start and end odometer readings for the year to calculate total miles.

• Use of office in home is so uncommon for an employee that it is often not worth the increased scrutiny to claim this deduction. Against schedule C income, the home office saves SE as well as income tax but not so when taken on a 2106.

Saturday, January 14, 2012

The ‘I'm in Love with the Sound of My Own Theory’ Case


Taxpayer unsuccessfully fought the full inclusion of dividends in his taxable income under his self-developed “return of capital” theory. (A theory that the court deemed “without statutory basis” by the way.) TP claimed that a portion of the purchase price represented “accrued dividends” that had accumulated since the last record date. In TP’s view, these portions are treated as “returns of capital” and are not be includable in gross income.

Take Aways:

• Under TP’s theory he would have had to painstakingly reduce his basis in these shares by the part of the purchase price he recaptured through designating a portion of dividends as tax free returns of capital. This would result in higher taxable gains down the line when the shares were sold.

• What a surprise that his return was self-prepared!

• There is ample guidance on who recognizes dividends so it is sort of odd that he spent Lord knows how much time calculating accrued dividends and no time researching code. It is not as though this is a rare situation!

Friday, January 13, 2012

The ‘Close but no Cigar’ Case


The taxpayer was denied a deduction for the $19k of travel and meals expenses he claimed on a schedule C for the trade of being an author. TP had no experience working as an author, had not yet published a book, had a full-time W-2 position in a completely different field, and had no income from the trade in that year. The expenses were incurred on a 4 month worldwide trip he claimed was solely for book research. Although he had a business plan and kept a journal, all the facts and circumstances are considered and he did not meet the burden of proof. (He did dodge the accuracy penalty because he relied on the counsel of a CPA to whom had given all the information.)

Take Aways

• TP would need to prove he intended to earn a profit from the activity, that he was regularly and actively involved with the activity, and that the activity had commenced.

• Since the majority of the expenses were for travel and meals, TP was obligated to strict substantiation – no estimates allowed. A sweeping statement that ‘all’ the travel was for business would not fly. TP must establish the business purposes of EACH expenditure and substantiate it by a written statement.

• In general, any expenditures incurred before your business activity commences must be capitalized as start up expenses, although this was not mentioned in the case. Also, high expenses on a zero income schedule C create a red flag - especially T/E expenses.

• The checklist to prove profit motive for an endeavor contains many factors. It sounds as though TP had the checklist and he complied with a few line items but it was all very contrived.

Thursday, January 12, 2012

The ‘I’m from the Govt and I’m here to help’ Case

TP conveyed an easement to 501(c)3 conservation fund. Generally the difference between the value of the property with the easement vs. without the easement constitutes a charitable deduction for the conveyor. TP is permanently sacrificing that value even though they still own the property. (Note that this is an exception to the general rule that only the contribution of an enitre interest will qualify as a charitable contribution.) It is normal for the contribution deductions resulting from conservation easements to be in the hundreds of thousands of dollars and so one should expect increased IRS scrutiny. In this instance the transaction failed as a matter of law because the contract contained the following wording:

Extinguishment – If circumstances arise in the future such that render the purpose of this Conservation Easement impossible to accomplish, this Conservation Easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination.

This ran afoul of the following parts of the code which provide for the ability to obtain a charitable contribution:

“A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity.” And “interest in the property retained by the donor ** * must be subject to legally enforceable restrictions * * * that will prevent uses of the retained interest inconsistent with the conservation purposes of the donation.”

This case is a bit scary because one would assume the conservation 501(c)3 attorneys would have drafted an appropriate contract. You know the contributors were not the ones to write the contract.

Take aways:

• The court ruled that the remoteness of the likelihood of this clause ever being exercised was neither here nor there as far as the outcome of this case was concerned.

• TP argued that the gift constituted the creation of a charitable trust. The court noted that State law determines the nature of the property rights, and Federal law determines the appropriate tax treatment of those rights. There was no evidence to indicate that their State considered contributions to conservation easements to be de facto trusts. Nor was there any language in the conservation easement deeds to evidence either the creation of a trust or the intention to create a trust.

• Pay a CPA and a tax attorney dummy! I had a call once from a farmer seeking an appointment to discuss the tax treatment of conservation easements. He refused to come in unless the consult would be free. Really? Trust me when I tell you, screwing this up may be life changing. It is worth the money to get professional advice.

• In the future I will require that clients in this situation retain a tax attorney to review the contract and issue an opinion letter re: the legitimacy of the charitable contribution prior to preparing the return – or even better before they sign the contract so the recipient can be made to change the wording. (My opinion is that CPAs should not be interpreting contracts. That is a legal service.)

Wednesday, January 11, 2012

The ‘Columbian Laundry-ing?’ Case


Taxpayers were assessed a deficiency on the total disallowance of all $134k of cost of good sold expenses claimed against $161k of income because they did not keep adequate records. Taxpayers’ business was to buy clothing in the US and export it to Columbia.

Take Aways:

• The IRS filed the notice of deficiency about 2 years after the return was filed so just because you file a return and don’t hear anything for awhile, it is not correct to assume everything is copasetic.

• The court found TP’s receipts bad evidence because they: did not indicate which purchases of clothing were for export and which purchases were for the Gaitans’ personal use; in some cases, were illegible/did not clearly identify the purchaser, or had been deducted on their other schedule C. (If you are a retailer, it is probably best to show some withdraw of inventory for personal use vs. none at all.)

• The court would not admit credit card statement evidence because she was without the supporting receipts or other evidence corroborating that the purchases reflected on the American Express statements were purchases of business inventory. In addition, some months were missing which may have reflected credits/refunds. (We regularly advise our clients that they need to retain the actual merchant receipt – not just the statement. That is like having cancelled checks with no record of the invoices you paid.)

• The court would have been able to estimate all but vehicle expense if she had brought more to the table. She did not even have evidence of any clothes being shipped out of the US. (Husband owned a car wash by the way. Hmmm…Saul from Breaking Bad is coming to mind here…)

• The TP also lost the much smaller deduction for travel because she failed to prove that the trips were PRIMARILY for business. Many people think if they do any business on a trip it is deductible, but the burden of proof (for within the contiguous US) is the PRIMARY purpose. There can be many purposes but only one PRIMARY purpose.

Tuesday, January 10, 2012

The ‘Of All People’ Case


Was there a full moon on 1/3? Taxpayers were assessed the deficiency plus the extra penalty for drastic understatement because they failed to keep adequate records and properly substantiate the flight lesson expenses they claimed. The taxpayers were a couple that included a highly compensated CPA employed by a corporation AND a 20 year financial planner/commercial realtor with an MBA. They claimed that A) they did not know they needed to keep receipts for business deductions and B) their tax preparer told them they did not need to keep receipts. They should be ashamed of themselves! The court noted humorously that they were “skeptical” of their “alleged” lack of knowledge. Tee hee.

Take Aways:

• This is why CPA firms must now require an engagement letter in order to prepare a tax return. You’d think that a couple with these credentials would not try to dishonestly throw you under the bus to save a few thou but, sadly, this is the world we live in currently!

• To deduct education costs the course must maintain or improve your skill for your current position only. The court was not convinced that pilot skills go hand in hand with being a commercial realtor. Even though the TP did submit evidence that he used aerial photos in sales brochures he created, the court noted that he was able to obtain these in the past without actually needing to know how to pilot a plane. Doh! (They admitted he did not make an effort to persuade them so who knows what would have happened if he had?)

Monday, January 9, 2012

The ‘Not a Leg to Stand On’ Case


I cannot fathom why the taxpayer went to court. He filed three schedule C forms, one with less than $2k of income and lots of mileage, one with zero income and almost $70k of expenses including $12k of vehicle deductions. He was just asking to be audited. The court noted that he introduced “no evidence of any sales efforts that could lead to customers” and “no credible evidence to substantiate that the claimed expenditures were ordinary and necessary to his business, or showing that they even exist.” He lost and was also assessed the additional penalty for significantly understating his tax liability without reasonable cause.

Take Aways:

• TP claimed that his records were destroyed by fire. If someone is able to materially reconstruct the vast majority of their records after a bona fide tragic occurrence the court would fill in the rest but in most cases the taxpayers just arrogantly say – “Sorry I don’t have anything – it was all destroyed” Trust me, this has been tried before. You have got to pull out all the stops to reconstruct your records to the very best of your ability if they are lost in a fire.

• A schedule C with no income and lots of mileage is a big audit risk.