Journals and Invoices Alone do not Support Deductions

The case: G, an attorney, also ran an import business. He reported his activities on separate Schedules C with his 1040.

To support his deductions, G submitted handwritten journals of payments by month with generic descriptions, such as “law book,” “repairs,” “software.” He claimed to have credit card statements and receipts but produced neither.

The IRS denied a number of the deductions for both businesses. Reason: inadequate documentation.

The decision: For the IRS. Self-generated expense records and receipts, or those that are not itemized, do not substantiate deductions. Receipts, credit card statements, canceled checks and other third-party items must have sufficient detail to substantiate the expenses being deducted. Credit card statements alone are rarely sufficient because they do not have enough detail about the expenses.

The penalty: Failure to keep adequate records is negligence. As a result, in addition to paying penalties, G’s denied deductions resulted in a second penalty for substantial understatement of tax. [Gorokhovsky v. Commissioner, T.C. Memo. 2012-206]

–AIPB Bookkeeping Tips

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