Originally published on Forbes.com.
I am so relieved. It has been a month since we have had a fresh Tax Court decision. The long dark night finally ends with T.C. Summary Opinion 2019-1.
The name of the petitioner is, of course, public record and you can easily find it, but it is one of those cases where I figure the taxpayer does not need me to help him be more famous so I will call him Joe. The case is pretty much a mess and I would normally skip it, but I figure my readers must also be suffering from Tax Court Withdrawal Syndrome.
Big Dollars For A Summary Decision
Joe was hit with deficiencies for 2009 and 2010. With penalties, the tab was close to $70,000. That kind of stakes it starts getting worth hiring a lawyer, but Joe was on his own. He also prepared his own return using the expensive and unreliable software that Robert Flach condemns when he does not have his sights on the “idiots in Congress” and reality TV.
There were eleven issues including the penalties. It was almost like every number on the return was wrong – except maybe Joe’s house number and SSN.
Not A Rollover
The biggest issue was a $43,503 IRA distribution, which Joe reported as being rolled over. It wasn’t. Joe tried to beat the 10% penalty by arguing that he was disabled or in the alternate spent the money on medical expenses. The former argument failed because he was driving many miles a day on his job selling medical supplies, so he may have been not doing so well, but he was clearly not disabled. And he did not substantiate the medical expenses.
Substantiation
The other big adjustment was Schedule A employee business expenses – mostly mileage on his car. The Tax Court kind of believed him, but the documentation was very weak. He said that he had a copy of his employer’s policy that showed that he would not be reimbursed, but did not bring it with him. And when it came to his logs, which are required, don’t get them started:
The monthly mileage logs for the years at issue list four weeks per month from Monday to Friday without any corresponding dates and list the names of medical facilities or hospitals with a corresponding figure representing an alleged mileage calculation. The mileage logs fail to identify a business purpose for the miles recorded, including whether sales were made for his employer or the medical sales company or both at each location. According to the mileage logs, petitioner drove a total of 28,752 business miles and 11,849 business miles in 2009 and 2010, respectively, for his business, less than the figures reported on the Forms 2106-EZ for both years.
There were similar substantiation issues with charitable deductions and a repair deduction on a rental property. The repair deductions were substantiated by receipts that were carefully placed in an envelope. That envelope is probably in the same place as the notebook with information about the charitable contributions and that employer reimbursement policy statement. It’s not just having substantiation. It’s also bringing it with you.
All in the main theme of the case is Reilly’s Sixteenth Law of Tax Planning – Being right without substantiation can be as bad as being wrong.
The case is actually a good lesson for do-it-yourselfers. After the return is done, look at each number and create a little schedule with the numbers that make up that number and something that supports each of those numbers. The education requirement of an IRS Revenue Agent is a bachelor’s degree with 30 credit hours in accounting. Accountants respond well to those ticked and tied schedules.
Other Coverage
Joe Kristan tweeted on the case. Lew Taishoff is easing off withdrawal by blogging about orders. Truly astounding that he did not get to this decision first. Unlikely to happen again.