In a recent IRS Tax Court case, DOUGLAS K. AND GAYLE L. BARRETT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE SERVICE, Respondent, July 21, 2008,
California taxpayers filed a US Tax Court US TAX COURT Complaint against the IRS for tax increases resulting from IRS Tax Audit. Taxes at issue are not for IRS payroll tax.
In the tax court, taxpayers claimed certain deductions including tools and automobiles used for the taxpayer’s contractor business. However, IRS disallowed these deductions in the tax audit. IRS also charged an accuracy-related penalty-20 percent pursuant to IRS Tax Code section 6662(a).
IRS taxpayer did not provided any documentation to substantiate the cost of goods sold reported on their tax return. IRS tax auditor denied most of the business related expenses.
US Tax Courts have held that where taxpayers’ testimony is general, conclusory, or uncorroborated, the Court is not required to accept such testimony as sustaining taxpayers’ burden of proof. See Lerch v. Commissioner, T.C. Memo. 1987-295, affd. 877 F.2d 624 (7th Cir. 1989); Geiger v. Commissioner, T.C. Memo. 1969-159, affd. 440 F.2d 688 (9th Cir. 1971).
Tax Practice Note:
Taxpayers bear the burden of proving the Commissioner’s determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
IRC Section 162(a) allows deductions for ordinary and necessary expenses of carrying on a trade or business. Section 7491 regarding the burden of proof is not applicable in this case because petitioners have failed to meet the requirements of section 7491(a)(1) and (2).
IRS tax deductions are strictly a matter of legislative grace, and taxpayers bear the burden of proving they are entitled to any claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
Section 6001 requires taxpayers to maintain adequate books and records sufficient to substantiate all costs of goods sold and all deductions claimed on tax returns.
Section 274(d) requires taxpayers to substantiate any claimed deductions of listed property by adequate records or sufficient evidence and bars any deduction for an expenditure governed by section 274 on the basis of unsupported testimony of the taxpayers or on the basis of the taxpayers’ approximation.
IRS must prove penalty assessments under Section 6662(a) and (b)(1). This section imposes a 20-percent penalty on the portion of an underpayment attributable to negligence. Negligence includes any failure to keep adequate books and records or to substantiate items properly.
Sec. 1.6662-3(b)(1), Income Tax Regs. The Commissioner has the burden of production with respect to accuracy-related penalties. Sec. 7491(c). To meet that burden, the Commissioner must produce sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the ommissioner’s determination is incorrect. Rule 142(a); Higbee v. Commissioner, supra at 446-447.
The taxpayer may meet this burden by proving that he or she acted with reasonable cause and in good faith. See sec. 6664(c)(1); sec. 1.6664-4(a) and (b)(1), Income Tax Regs.