The Importance of Proper Tax Documentation in Tax Deductions

The IRS’ determinations in a notice of deficiency are generally presumed correct. Therefore, unless specifically excepted by Tax Court Rule or statute, the burden of proof in civil tax proceedings is ordinarily on the taxpayer(s). Last week, the U.S. Tax Court issued a summary opinion sustaining the IRS’ denial of deductions because the taxpayers’ “hodgepodge of receipts” was insufficient to substantiate their claims. Wright v. Comm’r of Internal Revenue, No. 17520-19S (U.S.T.C. Jun. 10, 2024).

The IRS examined an S corporation’s 2015 Form 1120-S, U.S. Income Tax Return for an S Corporation, and disallowed a portion of the company’s claimed deductions. Those disallowances resulted in the IRS making positive adjustments to the S corporation’s business income for each year and, consequentially, positive adjustments to the amounts of flow through income reported on the owners’ related Schedule E (i.e., on the owners’ personal income tax return). The Wright case is yet another reminder of the importance of maintaining credible records to ensure transparency and creditability in the production of evidence. Wright v. Comm’r of Internal Revenue, No. 17520-19S | Casetext Search + Citator