The Importance of Substantiating Deductions and the Government's Burden of proving Penalties

Here's a case where pro se tax payers did themselves no favors in tax court lacking documents while providing conflicting excuses for not having them.

Generally, deductions are a matter of legislative grace, and petitioners bear the burden of proving their entitlement. INDOPCO v. Comm'r (1992).

In the below case, which is linked to a tax-court opinion, the taxpayers failed to substantiate their claim that they owned property or conducted the business to which the deductions were related (rental and leasing). Consequently, the losses reflected on their Schedule Cs for two years were disallowed.

Applicable Penalties:

Failing to keep adequate books and records supports a claim of negligence to support a 6662 penalty.

An understatement penalty is applied if a) 10% understatement of tax liability; or 5) greater than $5,000. Potential defenses to an understatement penalty are reasonable cause and/or good faith compliance. The government bears the burden of production on the imposition of a penalty. (IRC 7491(c)).

Tax Court Opinion of June 7, 2018.

RAGHVENDRA SINGH AND KIRAN RAWAT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

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