Unreported Income Taxable, Deductions Disallowed Due to Inadequate Substantiation, and Penalties Applicable

Unreported Income Taxable, Deductions Disallowed Due to Inadequate Substantiation, and Penalties Applicable

An individual received unreported income based on a reconstruction by the IRS, was denied claimed deductions, and was liable for penalties. The IRS used the bank deposits analysis method to reconstruct income unreported by the taxpayer. The taxpayer’s claim that the deposits reflected loans and transfers was rejected because he was not specific and expected the court to perform another bank deposits analysis without further aid or explanation from him. The IRS’s disallowance of a number of business expense deductions claimed by the taxpayer under Code Sec. 162 was upheld. Deductions for office expenses, repairs and maintenance, supplies, and insurance expenses were disallowed because the substantiation offered by the taxpayer was inadequate, and insufficient evidence was provided on which to base an estimate.  Deductions for legal and professional fees were disallowed because the fees were not incurred in the carrying on of an existing business, but were related to litigation after the business had ceased operations. Travel expense deductions did not meet the strict substantiation requirements of Code Sec. 274(d).  The taxpayer took an early distribution from his IRA, and was liable for an additional tax under Code Sec. 72(t) for early withdrawal from a qualified retirement plan. The taxpayer claimed to have used the funds for business purposes, which is not an exception to imposition of the additional tax. The accuracy-related penalty under Code Sec. 6662 was sustained based on substantial understatement of income tax. The taxpayer, despite being a certified public accountant, failed to make sufficient effort to assess his proper tax liability!

By |2014-04-21T10:03:36+00:00May 28th, 2012|Individual Income Taxes|0 Comments
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