Schedule C expenses

[joanmcq]

I had an auditor that wouldn't budge when I had a client that was hit by Rita. The reason he still had his truck and the few records that were in it was because that was the truck he drove to evacuate. The auditor said to get records from the company then; the building the company was in took 6 ft of water. I even sent in news stories showing the town was 90% destroyed, maps showing where he lived, where the company was in relation to the storm surge....nothing.

And the people I worked for refused to petition appeals.

[MAMalody]

taxxcpa - In reference to the supervisor comments, he did say that we were not to make the law, only to administer it. Let the chips fall where they may. I, personally, did not find most practitioners had to argue for their clients. Either they met the criteria or they did not. I did have some where discretion was the issue, and generally, I found that most practitioners used pretty good common sense and discretion.

[taxxcpa]

Records destroyed

I had a client who got out of showing records by claiming they had been destroyed by a tornado that had hit his town. The tornado part of his story was right, but I'm not sure his records, if any, were destroyed.

[Bees Knees]

Hmmm. Since the preparer does the work and the IRS auditor simply reviews it, when I was an auditor I would have said, "Let's do the work. I will give you a couple of weeks to do that. Now about those acknowledgment letters for her contribution deductions..." About 20% of those I audited did get additional refunds, about 70% owed and 10% were no changes.

I’d say fine, I get more billable hours, my client gets a bigger refund, and you get the satisfaction of helping one more taxpayer get the refund they deserve. Oh and I’ll concede the charity issue...no where as big as those Schedule C deductions.

BTW, I know this isn't suppose to matter officially, but lets say you went through a period where it was 20% owed and 70% refunds to the taxpayer, maybe because you hit a string of CPA and EA reps who liked to argue tooth and nail over everything you brought up...all while everyone else in your office averaged 70% owed and 20% refunds...Would your supervisor simply say: "Nice job getting all those refunds for taxpayers...our job to help taxpayers get the correct refund…" Or would your supervise look a little closer at your auditing skills?

[Nashville]

Contributions Court Case - TTB

One of the recent court cases described in The Tax Book this year involved a Sch A deduction for contributions.

Appears the taxpayer took a typical deduction for charity on their Schedule A - probably a large amount. They had no corroborating statement from their church. So they went to their church and got a proper statement as to the amount they had contributed.

IRS disallowed the deduction because the statement was not "contemporaneous." A little over the top on the part of the IRS in my opinion. But the thing went to tax court, and IRS won.

[MAMalody]

Well, for that matter, anything and everything is deductible...until you get audited. I can claim all seven of my cats as deductions on my tax prep business and IRS will never challenge it...until they audit me.

As for the original poster, I would not have any trouble defending this client in an audit.

IRS: "So, let me see your cancelled checks and receipts for all these deductions claimed on Schedule C."

Me: "My client didn't keep any records. Her husband just made a guess that 30% of her gross receipts represents the expenses she incurred during the year."

IRS: "I can't allow any deductions unless you show me receipts."

Me: "Sure you can. Ever heard of Cohan?"

IRS: "You have to have something for me to go on. I can't just accept a wild guess."

Me: "OK, when I took over this client's return for 2012, she told me her husband would just take 30% of gross receipts as a deduction. However, now that they are no longer together, she didn't feel right about that. She actually thinks she spent more money than she made this year. Based upon my initial review of her check register and some of the receipts she was able to dig up, I have confirmed that for 2012 she will in fact have a net operating loss. You know as well as I that an NOL means more than a 30% deduction from gross receipts."

"Since you are auditing 2010 and 2011, I suspect that if I took some time and worked with this client, I think I could re-construct her records and do a rather convincing job - if this ever went to court - that my client actually spent far greater than 30% of her gross receipts on legitimate business deductions. I'm sure I could also dig up some statistics on other businesses in her industry and confirm that the margins in this industry are much lower than the 70% margin she reported."

"Now...do you want to waste a whole bunch of time having us go through this long process of re-constructing all these deductions, which I guarantee after I am finished, you will wind up owing my client additional tax refunds plus interest? Or shall we just accept the 30% estimate and just call it a day?"

IRS: "OK, can we look at her acknowledgment letters for her charity on Schedule A?"

Hmmm. Since the preparer does the work and the IRS auditor simply reviews it, when I was an auditor I would have said, "Let's do the work. I will give you a couple of weeks to do that. Now about those acknowledgment letters for her contribution deductions..." About 20% of those I audited did get additional refunds, about 70% owed and 10% were no changes.

[Bees Knees]

Well, for that matter, anything and everything is deductible...until you get audited. I can claim all seven of my cats as deductions on my tax prep business and IRS will never challenge it...until they audit me.

As for the original poster, I would not have any trouble defending this client in an audit.

IRS: "So, let me see your cancelled checks and receipts for all these deductions claimed on Schedule C."

Me: "My client didn't keep any records. Her husband just made a guess that 30% of her gross receipts represents the expenses she incurred during the year."

IRS: "I can't allow any deductions unless you show me receipts."

Me: "Sure you can. Ever heard of Cohan?"

IRS: "You have to have something for me to go on. I can't just accept a wild guess."

Me: "OK, when I took over this client's return for 2012, she told me her husband would just take 30% of gross receipts as a deduction. However, now that they are no longer together, she didn't feel right about that. She actually thinks she spent more money than she made this year. Based upon my initial review of her check register and some of the receipts she was able to dig up, I have confirmed that for 2012 she will in fact have a net operating loss. You know as well as I that an NOL means more than a 30% deduction from gross receipts."

"Since you are auditing 2010 and 2011, I suspect that if I took some time and worked with this client, I think I could re-construct her records and do a rather convincing job - if this ever went to court - that my client actually spent far greater than 30% of her gross receipts on legitimate business deductions. I'm sure I could also dig up some statistics on other businesses in her industry and confirm that the margins in this industry are much lower than the 70% margin she reported."

"Now...do you want to waste a whole bunch of time having us go through this long process of re-constructing all these deductions, which I guarantee after I am finished, you will wind up owing my client additional tax refunds plus interest? Or shall we just accept the 30% estimate and just call it a day?"

IRS: "OK, can we look at her acknowledgment letters for her charity on Schedule A?"

[ChEAr$]

So can I, but only in an audit situation. I would be hard pressed to take that approach when preparing a client's return.

Actually I did just that when preparing a return once upon a time. All we had were 1099 info and his spiteful ex wife wouldn't release, or maybe had trashed his records previously. So I estimated labor costs based on a percentage taken from four previous years, plus an estimated truck expenses cost, plus actual insurance costs for workmens' comp from agent, put it all together and slapped one of those xxxx forms with it (disclosure form) and he filed it. Never heard a word from IRS except "thank you" for filing.

[ChEAr$]

A 30% of gross receipts deduction may not be law, but it is possible somebody came up with that as a compromise in an IRS audit. I can believe that.

Exactly. In an audit, specially one with only 1099misc information from IRS at that, the IRS people will allow certain percentages, depending on line of work, as attributed deductions. For a carpenter once it was 50% deemed what he would pay his "subcontractors". The percentage does vary of course. For a retailer with no records, e.g. all records lost in fire before tax return could be completed, an allowance might be made for a certain percentage as cost of goods sold.

[Snaggletooth]

7.65% is guaranteed

He actually DOES get a guaranteed percentage of the gross if he deducts no other expenses.

It's called an adjustment, and is equal to one-half of the resulting self-employment tax....

[Roland Slugg]

A 30% of gross receipts deduction may not be law, but it is possible somebody came up with that as a compromise in an IRS audit. I can believe that.

So can I, but only in an audit situation. I would be hard pressed to take that approach when preparing a client's return.

When "scoring" returns for audit selection purposes, the IRS probably uses percentages of all kinds based on Schedule C/E/F gross income, industry averages, AGI, itemized deductions, state/region, and many others. The IRS is very secretive with its DIF scoring formulas, of course, but who knows? Maybe expenses of 30% of Schedule C sales is one of them.

[Bees Knees]

30% Gross Receipts Deduction - not that far fetched....

It actually has some legit legs. Under the famous Cohan court case (see TTB, page 5-8), a theatrical manager and producer kept no records. He came up with an estimate of what it probably would cost to run his type of business. The IRS disallowed all deductions for lack of substantiation, but the 2nd Circuit Court of Appeals said something had to have been spent. The court said: "The [IRS] should make as close an approximation as it can...to allow nothing at all appears to us inconsistent with saying that something was spent."

I had an audit case years ago where the taxpayer had not filed a tax return for 10 years. All income was easy, as everything was reported on 1099s. The taxpayer kept delaying because of his lousy recordkeeping and kept trying to dig up receipts. The IRS auditor lady finally said, how about we take 20% of your gross receipts and call that your business deductions and call it a day. The taxpayer was fine with that. I was fine with that. Problem solved.

A 30% of gross receipts deduction may not be law, but it is possible somebody came up with that as a compromise in an IRS audit. I can believe that.

[RitaB]

Well, there you go

Well, he is 7% right.
There's no electronic filing at all for the first 29 days of this year.
Period.

Once again, I have misjudged the situation. I have GOT to stop being so "glass is half empty".

I am still laughing about you being a half-fast reader, BTW.

[Burke]

I have a client whose husband has always done their own taxes for years. She's an independent contractor, and her husband has been taking her gross pay and deducting 30% of it as expenses every year. This year she said she had lots of new expenses and her pay has taken a severe nose dive, and she told me that she's quite sure she had a net loss, but she said she didn't keep track because she had always just claimed the 30%. When I asked why 30%, she said her hubby told her that a person can choose to deduct actual expenses or 30%. He somehow thinks that is a rule that he either read about or somebody told him. Has anybody here heard of such a thing? I'm having a difficult time imagining that the IRS would create such a rule, but of course, as we all know, not everything the IRS does makes sense. I'm 99% sure this is just an old wives' tale, but wanted to see if anybody else had heard such a thing.

Unbelievable. He may have been thinking of bus auto usage, but it still needs to be documented each year and the appropriate mileage rate taken. I bet she can come up with something. Surely, she did not pay all her expenses in cash with no receipts. It is going to take some work on her part to substantiate a loss.

[JohnH]

Me neither, I think taxxcpa has the scoop on this one. But, I did have a client call this morning asking if it was true that there was no electronic filing this year. At all. Period.

Well, he is 7% right.
There's no electronic filing at all for the first 29 days of this year.
Period.