If you want to take a deduction, you have to be able to document it. If you want to take a business deduction, you need to have at least rudimentary business records to document the who, what, when, where and why of your business spending.
Armies of government employees have lived comfortably off the extra taxes paid by taxpayers who fail to maintain their business records. Another taxpayer was defeated by poor records in Tax Court yesterday.
Robert Damron was a postal worker in San Francisco in 2001. He also ran a little side business:
At trial, petitioner gave examples of the services he provided, such as assisting businesses collecting debts from customers, searching courthouse records or newspapers that might provide information that could lead to assets of delinquent customers, negotiating with debtors, etc.
His day in Tax Court went badly:
At trial, petitioner offered into evidence copies of various checks that were issued purportedly for payment of expenses related to the activity; however, no documentation was offered to tie in or corroborate that such payments were in connection with the business activity. Petitioner claims he had such information at home and did not realize that such information was crucial to his case.
The case should never have gotten to the point where Mr. Damron was trying to explain cancelled checks to a judge. If he had kept decent records, the original IRS agent who audited him would have probably gone away satisfied. While keeping good business records is wise for many reasons, it's essential for taking business deductions.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to