Slow economic times can present challenges for taxpayers under an IRS audit or examination. As tax attorneys in Columbus, Ohio, we assist many individuals and businesses that become subject to an IRS audit or examination. Keeping adequate records is one of the most important things you can do to avoid a potential IRS audit or examination, and ensure that an IRS audit or examination does not result in an assessment of additional tax, penalties, and interest. Below is a United States Tax Court case example of a taxpayer that did not keep proper records and documents and therefore could not successfully defend against an IRS examination. The tax lawyers at Nardone Law Group assist Ohio taxpayers on understanding IRS record keeping requirements and can provide some helpful tips on what types of documents to keep to successfully defend against an IRS audit or examination.
In Gorokhovsky v. Commissioner, T.C. Memo 2013-65 (full case opinion linked), the United States Tax Court considered an IRS examination by which the IRS found a deficiency in the taxpayer’s taxes and imposed an accuracy-related penalty as a result of the underpayment of tax. The IRS examination arose from the taxpayer’s occupation as a self-employed attorney. The taxpayer challenged the IRS examination. The issues from the IRS examination were: (1) whether the taxpayer’s self-generated records and minimal supporting documentation were sufficient to substantiate deductions claimed on his tax returns; (2) whether the taxpayer’s statements and testimony regarding various unreported bank deposits were sufficient to show that those deposits were not income that should have been reported on his tax returns; and (3) whether he was liable for the accuracy-related penalty for underpayment of tax.
Agreeing with the IRS Examination, the court disallowed most of the taxpayer’s general business deductions as unsubstantiated expenses, and added the additional unreported bank deposits to the taxpayer’s income. First, the court held that the taxpayer’s testimony as to his home office expense deduction was insufficient, because the taxpayer did not provide evidence demonstrating the nature or extent of the work performed there, whether he met clients there, or any other evidence showing the business use of the area. In denying the home office deduction the court also noted that the taxpayer leased a separate office for his law practice and offered no evidence to refute that the leased office was his principal place of business. Second, the court rejected the taxpayer’s claimed business meal expenses because he provided no documentation of the place, time, and business purpose for the meals. Third, the court disallowed the portion of the taxpayer’s claimed business travel expense deduction that related to travel to and from his home, as his home office had already been disallowed. Fourth, the court considered various bank deposits to be unreported income of the taxpayer, as the taxpayer offered no evidence to refute that finding, but offered only his own self-serving statements to explain the unreported deposits. Finally, the court imposed the accuracy-related penalty on the taxpayer because he had substantially understated his income tax based on negligence in failing to maintain adequate records to support his deductions.
As the above case example demonstrates, it is very important to maintain proper documentation to substantiate all business expenses deducted on a tax return so that you can effectively defend an IRS examination or audit. The tax attorneys at Nardone Law Group routinely advise taxpayers on the importance of keeping proper documentation and the types of documentation to maintain as it relates to defending an IRS audit or examination. For helpful tips and more detail on the types of documents you should keep for tax purposes, see our prior article on Federal Tax Record Keeping and Documentation for IRS Audits here.
Nardone Law Group represents individuals and businesses in federal tax issues, including those who have become subject to an IRS tax audit or examination. If you are facing an IRS tax audit or examination or are interested in learning how to keep adequate records to substantiate items contained in your federal tax return, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients in IRS tax audits and examinations. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offer in Compromise, or the Fresh Start program. Contact us today for a consultation to discuss your case.