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An attorney was subject to accuracy-related penalties, and the IRS disallowed most business expense deductions he claimed in connection with his law practice.

Attorney Denied Deductions for Lack of Substantiation

  • 3/6/2013

Attorney Denied Deductions for Lack of Substantiation

An attorney is subject to accuracy-related penalties, and the IRS has disallowed most business expense deductions he claimed under Code Sec. 162 because he did not sufficiently itemize his expenses or provide details in his trial briefs to support his deductions.

The deductions were claimed in connection with his law practice, his import-export business, and his then-wife’s skin care business. Although the taxpayer did not sufficiently itemize his expenses, or provide details in his trial briefs, there was sufficient evidence shown by cancelled checks and check registers to support some expense deductions related to the law practice, which were allowed. All expenses related to the import business and the taxpayer’s wife’s business were disallowed as unsubstantiated.

The taxpayer was denied a deduction for home office costs under Code Sec. 280A because he did not provide sufficient evidence of the nature of the work performed in the home. Furthermore, the taxpayer leased an office and did not provide evidence to negate the inference that the office functioned as his principal place of business.

Meal expenses were not proven under the heightened substantiation requirements and were also disallowed. The taxpayer provided coded travel logs that purportedly supported his travel expense deductions. However, costs of travel from the taxpayer’s home to his office or to a courthouse were nondeductible commuting expenses. Exceptions to the nondeductibility of such expenses did not apply to the taxpayer’s situation.

The IRS analyzed his bank accounts and concluded that there was unreported income. The taxpayer claimed the amounts were payments on a prior loan or nontaxable transfers but did not provide supporting evidence, so these amounts were held to be unreported income.

The taxpayer’s failure to maintain adequate records justified a finding of negligence. Furthermore, he provided no argument at trial regarding the penalties. The fact that an accountant prepared his returns did not support a finding of reasonable cause because the taxpayer offered no testimony regarding the accountant’s expertise, the information provided to the accountant, or the taxpayer’s reliance on the accountant. The accuracy-related penalties under Code Sec. 6662 therefore applied for the years at issue.

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