IRS AUDITS and TAX COURT CONSIDERATIONS
By analyzing the following tax court rulings cases to settle disputes between the IRS (Respondent) and the taxpayers (Petitioner) on the accounting method that is called “Summary of Expenses”, we can understand what is expected from us:
1. IRS AUDITOR AUTOMATICALLY DISALLOWS MOST, IF NOT ALL DEDUCTION CLAIMED BY SUMMARY OF EXPENSES: “Petitioner asked the RA (Revenue Agent/IRS Auditor) why she did not allow the postage and shipping amounts that petitioner listed on summary of expenses she presented to RA and respondent’s counsel (IRS attorney)”.
2. SUMMARY OF EXPENSES IS NOT ACCEPTABLE BECAUSE IT FAILS TO SUBSTANTIATE BUSINESS PURPOSES: “Petitioner failed to substantiate the business expenses and startup expenditures disallowed by respondent. At trial, petitioner introduced only a brief summary of expenses and two promissory notes purportedly issued as payment for professional services. None of those documents established the dates, description, or business purpose of the expenses. The evidence offered was completely inadequate to substantiate petitioner’s claimed expenses as required by section 6001 and related regulations”.
3. SUMMARY OF EXPENSES IS NOT ACCEPTABLE BECAUSE THE EXPENSES ARE NOT DEDUCTIBLE JUST BECAUSE YOU SAY SO: “We cannot conclude that the amounts paid for various services were reasonable if neither we, nor Mr. Van Wickler, know the amounts of those expenses. A deduction cannot stand on so flimsy a foundation. Luman v. Commissioner, 79 T.C. 846, 859 (1982). Even if we concluded that a portion of Mr. Van Wickler’s payments was made, pursuant to section 212, for allowable ordinary and necessary expenses, the record fails to provide a rational basis by which we could allocate deductible and nondeductible expenses. See Epp v. Commissioner, 78 T.C. 801, 806 (1982). An allocation of a portion of the payment would be “speculative, amounting to ‘unguided largesse”. Luman v. Commissioner, supra at 859 (quoting Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957)). Accordingly, Mr. Van Wickler is not entitled to deduct expenses”.
4. SUMMARY OF EXPENSES + CANCELED CHECKS + CREDIT CARD STATEMENTS ARE NOT SUFFICIENT: We turn initially to the disallowed 2007 Schedule C expenses of $338,047.76. It is petitioner’s position that he is entitled to deduct those expenses under section 162(a). In support of that position, petitioner relies primarily on (1) certain schedules showing by month and type of expense the total amount that he claims he paid for each type of expense during each month in 2007 in carrying on his law practice (petitioner’s summary claimed expense schedules) and (2) a document titled “Profit & Loss Detail” showing by month and type of expense the petitioner’s 2007 Schedule C gross receipts that respondent determined in the notice. Respondent disagrees.
THE COURT: So you believe that having a cancelled check or a credit card [statement] entitles you to each of the deductions, is that right?
THE WITNESS: Yes.
THE COURT: Any such position reflects a misunderstanding, or a disregard, of the requirements of section 162(a). Based upon our examination of the entire record before us, we find that petitioner has failed to carry his burden of establishing that he is entitled for his taxable year 2007 to deduct under section 162(a) the disallowed 2007 Schedule C expenses.