The Tax Court has ruled that deductions claimed, but unsubstantiated were not allowed. The couple owned a trucking business and claimed to keep sufficient records; however the records were lost in a fire.
The IRS was sympathetic and allowed the couple time to recreate the records in order to substantiate the deductions. No such attempt was made and the couple’s deductions were lost and penalties were assessed by the IRS.
Record keeping is a very important part of business. Here, it seems as though the couple tried calling the IRS’s bluff only to find out that the IRS was not bluffing. If you are under audit, the IRS will not allow a deduction where in fact, the deductions may have been completely legitimate. If the IRS demands records, the worst thing you can do is to not produce any.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors