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.

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