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Lost Records: Tax Court More Lenient Than IRS

Apr 4th 2016
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As a general rule, IRS auditors require taxpayers to substantiate their deductions for business expenses, like travel and entertainment, with “adequate records” – diaries, for instance.

The IRS tells its examiners to make some exceptions. Among other things, they are authorized to waive the recordkeeping requirements and accept “reasonable reconstructions” when, according to the agency’s administrative regulations, records were lost “due to circumstances beyond the taxpayer’s control, such as destruction by fire, flood, earthquake, or other casualty.”

Those regulations include a cautionary reminder that whether an event was beyond a person’s control depends on the particular circumstances.

Tax Court sometimes allows deductions without records. In a 1994 decision, the court rejected the IRS’s disallowance for lack of substantiation of deductions claimed by Marvin Eugene Huff. Marvin introduced evidence that a tornado destroyed a storage shed in which he had placed the records of his pulpwood logging business.

The court agreed with him that a tornado was an event beyond his control and cited his credible testimony about the expenses in issue. Accordingly, it concluded that the disputed deductions were reasonable in light of the nature of his business.

No-proof deductions approved by the Tax Court. Tom Owen McCallson became embroiled in a dispute over the right of his auto-repair business to use a piece of land. The dispute ended when the owner of the land used a snowplow to bulldoze the assets of Tom’s business into a ditch, destroying Tom’s tax records in the process.

Subsequently, Tom’s return was scrutinized by an unsympathetic IRS auditor, who disallowed his business deductions. The auditor was not content with assessing additional taxes and interest charges. He decided to throw in penalties because Tom had claimed expenses without substantiation.

Tom took the dispute to the Tax Court, where he prevailed. In a 1993 decision, the court concluded that he properly deducted undocumented business expenses; the facts demonstrated that he must have incurred them. It upheld his deductions for the expenditures in issue and erased the penalties.

Related articles:

Tax Season Reminders on Deductions for Travel
Tax Season Reminders on Deductions for Entertaining

Replies (2)

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By Clinton Lee
Apr 4th 2016 16:04 EDT

Interesting examples, thanks Julian. It's a shame they have to go to court first, though, especially when there are clearly good reasons for not having physical evidence of those expenses.

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Replying to Clinton Lee:
By Julian Block
Apr 4th 2016 20:51 EDT

Clinton, I agree. But if the IRS allowed the deductions in issue, I'd have to scramble to find something else to discuss.

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