My chronicle of how the IRS and Tax Court affect taxpayers' daily lives.

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Tuesday, October 27, 2009

Business Expenses - Substantiation

Ivette Munson v. Commissioner., U.S. Tax Court, T.C. Summary Opinion 2009-164, (Oct. 26, 2009)

Here we have another business substantiation case.  Ms. Munson, in her freelance translating service, was not entitled to deductions because the substantiation for her amended income tax return was poor.  She claimed deductions for telephone, mileage, and home office even though she was unable to show business use.

Cohan v. Commissioner allows the Court to estimate the amount of a deductible expense only when the taxpayer provides evidence sufficient to establish a rational basis for making the estimate (Cohan does not apply to travel and meals & entertainment).  The taxpayer was unable to prove that her residence was her principal place of business, which would be required in order to take all of the mileage she attempted to claim.

Additionally, the taxpayer claimed 54,000 business mileage (at a standard rate of 40.5 cents per mile, the deduction was $21,870).  This is the equivalent of a little over 200 miles per day for business use.  She submitted conflicting claims of mileage on her log summary, the log submitted to the court, and the mileage claimed on her tax return.  The court stated that "the inconsistent claims of mileage undermine the veracity of these documents."  These, as well as other inconsistencies, caused the court to take away all weight of the log, and disallow all deductions.

Next, the taxpayer attempted to deduct the cost of her home phone line.  It is important to remember that the first line of a home telephone system is ALWAYS considered to be a non-deductible personal line.  It does not matter how much evidence you may have.  Next, she also attempted to deduct her mobile phone expenses, although substantial, because she did not have substantiation of each business use, time of each use, and the business purpose of each use. 

The court goes on and on and on.  Although allowing for some minor deductions (the stated that "bearing heavily against [the taxpayer], whose inexactitude is over her own making, the Court will allow deductions for advertising of $50 and postage of $30), the taxpayer presented a sloppy case and was assessed an accuracy related penalty for her poor attempts to deduct items for which she had no substantiation. 

The final word from the court? "The code is certainly complex, but a taxpayer's ignorance of how to report her income and expenses does not provide reasonable cause for failing to include those items on her return."

Aaron's Take:  This should NEVER have gone so far as the tax court.  This taxpayer should have worked this through appeals, and moved on with her life.  Her deductions were so monumental, that it garnered huge attention (read RED FLAGS) and she complicated her life without need.  I can totally see her saying "Its just the principal of the thing."  No ... it's not the principal.  Its the LAW!.  Lady, FIND A TAX PROFESSIONAL.  PLEASE!!! 

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Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.

For official comments, please e-mail NAEA Director of Communications at or Arizona Society president

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