REPRESENTATION OF CLIENT DURING IRS EXAMINATIONConduct of IRS Examination: Four of your team’s clients have contacted you recently. They
have advised you that they are under examination by the IRS and want your assistance in dealing
with the IRS. The fact patterns are provided below.
Assignment: Draft a short answer to each of the clients based on the client’s questions which are
specified directly after each fact pattern. Each client memo should be about 1 to 2 pages or a total
of 4 to 8 pages maximum.
CLIENT C: Client C received a notification that he is being examined by Office Audit. He has a
meeting scheduled with IRS in two weeks. The letter he received from IRS indicated that they
will be examining his 2019 tax return. Specifically, he will be examining the following and
requests the following information:
1. Rental income – copies of deposit slips for rental income.
2. Rental expenses;
a. Depreciable assets purchased – copies of invoice for purchase and proof of
payment.
b. Rental repairs and maintenance – copies of bills and cancelled checks.
This is all the letter indicates with regard to the subject matter of the audit.
QUESTIONS:
1. Client C feels confident that he can convince the IRS of anything. Should you allow your
client to join you at the examination? If so, why? If not, why not?
2. For items paid with credit cards C has copies of credit card statements but no receipts. As
the statement reflects the payee, amount and the date of the transaction do you feel this is
sufficient? If not why not?
3. Since the client has a separate bank account for rental property, client would like to bring
all the bank statements and all the rental receipts. Is this advisable? If not, why not?
[DOCUMENT TITLE] | [Document subtitle]
Tax Research Memo
Sample Format
Your Firm
Your Town and State
Date
Relevant Facts
Specific Issues
Conclusions
Support
Actions to Be Taken
________ Discuss with client. Date discussed ________
________ Prepare a memo or letter to the client
________ Explore other fact situations
________ Other action. Describe:___________________________
_______________________________________________________
Preparer ________
Reviewer ________
Partner ________
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¶ L-4620 Application of the adequacy of records rules for substantiation of business expenses.
Federal Tax Coordinator Analysis (RIA)
Federal Tax Coordinator 2d
¶L-4620. Application of the adequacy of records rules for
substantiation of business expenses.
For purposes of the adequacy of records rules for substantiating business expenses described at
¶ L-4616 et seq., the following records were adequate (for inadequate records, see the list below):
. . . attorney’s (taxpayer’s) business day calendar, which was written in various inks and which
recorded the names of clients and employees the taxpayer had lunch or dinner with each
specific day, and the dates taxpayer traveled, coupled with the taxpayer’s detailed
memorandum explaining the circumstances of the meal, travel, and pre-2018 entertainment
expenses, and copies of receipts and credit card statements.
14
The following records were inadequate to meet the business expense substantiation requirements
at ¶ L-4616 et seq. (for adequate records, see the list above):
. . . estimation of tips at 15%.
14.1
. . . estimates of cash expenditures at fast-food outlets.
14.2
. . . diary omitting the locations and business purposes of the away-from-home
expenditures.
15
. . . diaries containing inconsistencies.
16
. . . diary/log that contained the names of people and places and the purported amount of
mileage for the taxpayers’ business travel, but the taxpayers had no receipts or other credible
evidence to corroborate the diary/log.
17
. . . taxpayer’s log of auto mileage was in pristine condition, all entries were in the same pen,
and the mileage listed for some days was so great (more than 500 miles) that the court
doubted that taxpayer could drive that far, work as an ironworker, and conduct Amway
activities on the same day.
17.1
. . . taxpayer’s appointment calendar contained weekly totals of business miles driven, but the
amounts were too large to be credible. For example, the calendar reflected that, on one week,
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he had driven 1,469 business miles, but the calendar also indicated that the only town he
visited that week was just 32 miles from his home.
. . . flight crew log containing estimated expenses.
17.2
18
. . . copies of cancelled checks, airline tickets, and miscellaneous receipts providing
insufficient information as to the amount, time, and place of the expenditures and no
information about business relationships.
19
. . . gas receipts unsupported by an account book. Gas receipts alone offer no way to
determine the percentage of the total travel costs expended on business.
20
. . . receipts and cancelled checks unsupported by an account book, diary, or other adequate
documentation.
21
. . . cancelled checks submitted as substantiation of a professor’s solo travel away from home,
where the checks were signed by his wife.
21.1
. . . estimated amounts where no checks were produced and the only evidence was notes
made after the end of the year when the taxpayer’s income tax returns were being
prepared.
22
. . . entries to a landlord’s logs weren’t made when the expenses were incurred and the entries
were incomplete and inadequate.
23
. . . log showed a salesman’s location each day, but didn’t show any of his expenses. Evidence
of three credit card statements and three credit card vouchers didn’t prove business
purpose for any of the expenses.
24
. . . photocopies of receipts and monthly statements from credit card company didn’t
provide the elements needed to be proved.
25
. . . taxpayer’s logbook and accompanying restaurant receipt stubs for alleged business
meals had discrepancies. Different types of stubs were used for the same restaurant within
short periods. Some stubs with identical styles and close receipt numbers were used to
substantiate meals at different restaurants. Some stubs with close receipt numbers were
either not dated closely or had dates in reverse order from the receipt numbers. Stubs with
consecutive receipt numbers either had reversed dates or dates that were up to several
months apart.
26
. . . less than half of the restaurant stubs taxpayer presented to substantiate his business
meals were imprinted with the restaurant’s name. Most showed the name of the restaurant, a
month and day but not a year, and an amount, handwritten in pencil by taxpayer. Neither
taxpayer’s diary nor the stubs showed the business purpose of any of the claimed business
meals, or taxpayer’s business relationship to any of the people listed as present at the meals.
The information in the diary and stubs was also contradicted by substantially all of the other
information in the record, including testimony by persons taxpayer listed as having dined with
him. There were numerous instances where taxpayer presented stubs of different styles for a
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single restaurant, or stubs of a single style with close receipt numbers for different restaurants.
The diary entries and stubs for one restaurant showed the meals as taking place in a year
before the restaurant opened.
26.1
. . . taxpayer kept a travel diary, but the diary didn’t reflect the business purpose of the
meeting, expense, or pre-2018 entertainment, the location where the entertainment took
place, or the business relationship with the person entertained. Furthermore, many
expenditures contained in the diary were clearly personal.
26.2
. . . taxpayer wrote amounts expended for meals and lodging on a piece of paper which was
included in an envelope for each week based on estimates of the amounts spent each day.
Taxpayer also admitted that he altered and manufactured documentation for lodging
expenses.
27
. . . there were substantial discrepancies between the amounts on taxpayer’s restaurant
receipts and the amounts in the logbook. Of the 37 receipts for one year, only two
approximated the taxpayer’s logbook for those dates. Eight receipts were submitted for days
on which the taxpayer didn’t work, and ten receipts had no date at all.
28
. . . handwritten and printed receipts from the taxpayer’s club where the inconsistencies
between them prevented the court from determining whether the receipts were adequate
substantiation for the deduction claimed for meals billed through the club.
28.1
. . . taxpayer’s log where the time and place of meals weren’t included. The court also didn’t
believe the almost daily entries for three meals and a snack when taxpayer, a pilot, could eat
on the plane.
29
. . . taxpayer’s self-generated spreadsheets, which were insufficient to sustain the deductions
where he failed to substantiate claimed deductions for travel and pre-2018 entertainment
expenses. He didn’t provide receipts, and his credit card statements didn’t reflect a name
or account number.
29.1
14 Burton, Thomas W., (2001) TC Summary Opinion 2001-155 .
14.1 Culwell v. Coard, William, (1967, DC NM) 19 AFTR 2d 1697 , 67-2 USTC ¶9508 .
14.2 Calarco, N. Joseph, (2004) TC Summary Opinion 2004-94 .
15 Coursey, James S. Jr., (1974) TC Memo 1974-43 , PH TCM ¶74043, 33 CCH TCM 205 .
16 Wilson, William R. (Bob), (1973) TC Memo 1973-92 , PH TCM ¶73092, 32 CCH TCM 407,
revd sub nom Linda Wilson v. Com., (1974, CA2) 34 AFTR 2d 74-5677 , 500 F2d 645, 74-2
USTC ¶9630 ; Rennie, Carlton, (1979) TC Memo 1979-2 , PH TCM ¶79002, 38 CCH TCM 3 .
17 Steines, Lorin J. v. Com., (1993, CA7) 993 F2d 1550, reh den (1993, CA7) 1993 US App
LEXIS 16933 .
17.1 Aldea, Daniela, (2000) TC Memo 2000-136 , RIA TC Memo ¶2000-136, 79 CCH TCM
1917 .
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17.2 Marquardt, Fredrick J., (2001) TC Summary Opinion 2001-59 .
18 Bowman, Paul V., (1979) TC Memo 1979-432 , PH TCM ¶79432, 39 CCH TCM 381 .
19 Prendergast, William F., (1983) TC Memo 1983-419 , PH TCM ¶83419, 46 CCH TCM 787 .
20 Langer, Henry J. v. Com., (1992, CA8) 70 AFTR 2d 92-6183 , 980 F2d 1198, 93-1 USTC
¶50008, reh den (1992, CA8) 1992 US App LEXIS 34016 .
21 Smith, Gene G., (1985) TC Memo 1985-366 , PH TCM ¶85366, 50 CCH TCM 492 .
21.1 Keating, Keith, (1995) TC Memo 1995-101 , RIA TC Memo ¶95101, 69 CCH TCM 2052 .
22 Paoli, Theodore H., (1971) TC Memo 1971-154 , PH TCM ¶71154, 30 CCH TCM 662 .
23 Sweet, James Percy, (1983) TC Memo 1983-348 , PH TCM ¶83348, 46 CCH TCM 456 .
24Miller, Sig, (1982) TC Memo 1982-491, PH TCM ¶82491, 44 CCH TCM 957.
25Lynch, Claud E., (1983) TC Memo 1983-173, PH TCM ¶83173, 45 CCH TCM 1125.
26 Farrer, John A., (1987) TC Memo 1987-406 , PH TCM ¶87406, 54 CCH TCM 149 .
26.1 Strong, Raymond, (1997) TC Memo 1997-105 , RIA TC Memo ¶97105, 73 CCH TCM
2141 .
26.2 Zand, J. J., (1996) TC Memo 1996-19 , RIA TC Memo ¶96019, 71 CCH TCM 1758, affd
(1998, CA11) 81 AFTR 2d 98-2380 , 143 F3d 1393, 98-2 USTC ¶50499 .
27 Sly, Dona H., (1989) TC Memo 1989-385 , PH TCM ¶89385, 57 CCH TCM 1111 .
28 Silkman, Craig, (1988) TC Memo 1988-291 , PH TCM ¶88291, 55 CCH TCM 1209 .
28.1 Pappas, Zabetti, (2002) TC Memo 2002-127 , RIA TC Memo ¶2002-127, 83 CCH TCM
1713 .
29 Keenan, Robert B., (1989) TC Memo 1989-300 , PH TCM ¶89300, 57 CCH TCM 762 .
29.1 Besaw, John Henry, (2015) TC Memo 2015-233 , RIA TC Memo ¶2015-233, affd (2017,
CA9) 120 AFTR 2d 2017-5485 (unpublished) .
END OF DOCUMENT –
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¶ L-4619.1 What is documentary evidence under substantiation rules?
Federal Tax Coordinator Analysis (RIA)
Federal Tax Coordinator 2d
¶L-4619.1. What is documentary evidence under
substantiation rules?
Documentary evidence ( ¶ L-4619 ) consists of receipts, paid bills or similar evidence sufficient to
support an expenditure.
1
Ordinarily, documentary evidence will be considered adequate to
support an expenditure if it includes sufficient information to establish the amount, date, place, and
the essential character of the expenditure.
2
Documentary evidence includes electronic charge expense receipts provided by a credit card
company.
3
In many cases, a credit card statement or charge record is sufficient documentary
evidence of an expense. For example, the nature of an expense paid to a car rental company is
ordinarily clear on its face.
4
If the nature of the expense isn’t clear on the face of the receipt, a
credit card receipt is sufficient if it contains an itemized breakdown.
4.1
Documentary evidence of lodging must show separate amounts for charges such as lodging,
meals, and telephone calls.
5
Thus, a hotel receipt will support an expenditure for business travel
if it shows the name, location, date and separate amounts charged for lodging, meals, telephone.
6
An electronic credit card receipt meets this documentary evidence requirement if the receipt
has an aggregate charge itemizing each expense, such as a final bill from a hotel listing separately
the costs for meals, lodging and telephone calls.
8
7
But neither an electronic credit card receipt
nor a regular credit card statement or charge record alone is acceptable evidence of a
lodging expense if the statement doesn’t segregate lodging from other expenses that may not be
deducted, such as nondeductible meal and entertainment expenses or personal expenses (e.g.,
personal phone calls or gift purchases).
9
A restaurant receipt is sufficient proof if it shows the name and location of the restaurant, the date
and amount of the expenditure, the number of people served, and if a charge is made for
something other than meals and beverages, an indication to that effect.
9.1
For documentary evidence for air travel expenses, see ¶ L-4619.2 .
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1 Reg § 1.274-5(c)(2)(iii)(A) .
2 Reg § 1.274-5(c)(2)(iii)(B) .
3 Rev Rul 2003-106 , 2003-44 IRB 936 ; IRS Letter Ruling 200304002 ; IRS Letter Ruling
200235006 ; IRS Letter Ruling 9706018 .
4 IRS Letter Ruling 200304002 ; IRS Letter Ruling 200235006 ; IRS Letter Ruling 200103015 .
4.1 IRS Letter Ruling 200304002 .
5 Preamble to TD 8715 , 3/24/97 .
6Reg § 1.274-5(c)(2)(iii)(B).
7Rev Rul 2003-106, 2003-44 IRB 936.
8Rev Rul 2003-106, 2003-44 IRB 936.
9 Preamble to TD 8715 , 3/24/97 ; IRS Letter Ruling 200103015 .
9.1 Reg § 1.274-5(c)(2)(iii)(B) .
END OF DOCUMENT –
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¶ L-3001 Deduction of expenses relating to taxes.
Federal Tax Coordinator Analysis (RIA)
Federal Tax Coordinator 2d
¶L-3001. Deduction of expenses relating to taxes.
All taxpayers, whether individuals or not, may deduct as business expenses the costs relating to
tax matters that are ordinary and necessary in the conduct of their trade or business.
1
IRS has ruled that the following expenses are deductible as trade or business expenses in
determining a taxpayer’s adjusted gross income under Code Sec. 62(a)(1) (see ¶ A-2600 et
seq.):
. . . expenses incurred by an individual taxpayer in preparing that portion of the taxpayer’s
return that relates to his business as a sole proprietor, and
. . . expenses incurred in resolving asserted tax deficiencies relating to the taxpayer’s business
as a sole proprietor.
Expenses incurred in preparing schedules or resolving asserted tax deficiencies relating to profit or
loss from business (Schedule C), income or loss from rentals or royalties (Part I of Schedule E),
or farm income and expenses (Schedule F) are also deductible under Code Sec. 62(a) .
2
IRS states that sole proprietors, farmers and other individual taxpayers with royalty or rental
income may deduct from gross income expenses related to the examination of the business or
income production portion of their tax returns.
3
RIA observation: Rev Rul 92-29 (see above) and IR 92-36 (see above), when read
together, presumably would permit audit (pre-90 day letter) expenses that are otherwise
business-related to be deducted in arriving at AGI, as well as post-90 day letter expenses.
Individuals are also entitled to deduct as nonbusiness expenses all ordinary and necessary
expenses paid or incurred in connection with the determination, collection or refund of any tax (see
¶ L-3002 ). The deduction is allowed even though the expense is in no way related to a trade or
business.
4
RIA observation: Return preparation costs that relate to the nonbusiness portion of an
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2728 ), not allowed in years from 2018–25 and subject to the 2%-of-adjusted-gross-income
(AGI) floor in other years (see ¶ A-2710 et seq.).
The deduction for tax-related investment expenses is a miscellaneous itemized deduction,
5
see
¶ A-2727 .
The costs must represent actual payments made by the taxpayer and not a valuation on the
taxpayer’s own time in preparing the return.
the tax returns were paid
7
6
The taxpayer must prove fees for the preparation of
and prove that the tax services were actually rendered.
8
In reconsidering IRS Letter Ruling 9126014 (see below) in light of Rev Rul 92-29 (see above),
IRS has ruled that taxpayers’ expenses related to the preparation of their Form 1040 are
deductible only from adjusted gross income as an itemized deduction under Code Sec. 212(3) ,
subject to the 2%-of-AGI floor. However, where taxpayers paid a CPA for tax advice concerning
items of income and expense related to their proprietorship which was reported on their Schedule
C, taxpayers’ tax advice expense related to the proprietorship is a trade or business expense that
is deductible from gross income in determining adjusted gross income. In addition, where
taxpayers paid their CPA for advice related to rental properties which taxpayers individually
managed (Schedule E), taxpayers’ tax advice expense related to the rental properties is
deductible from gross income under Code Sec. 62(a)(4) (see ¶ A-2601 ). Furthermore, taxpayers’
expense for tax preparation services that is properly allocable to the Schedule C or Schedule E is
deductible from gross income under Code Sec. 62(a) .
9
The IRS Chief Counsel’s Office ruled that premiums paid for “tax insurance” weren’t deductible
under Code Sec. 212(3) . The premiums in question were paid by a partnership to make sure that
its partners were reimbursed for any loss of tax benefits that might result from the denial of a
charitable deduction for a contribution of property made by the partnership. To be deductible under
Code Sec. 212(3) , an expense must be paid or incurred in connection with the determination,
collection or refund of any tax . Here that standard wasn’t met. The insurance policy wouldn’t pay
for any services or materials relating to the preparation of returns, the determination of any tax
liability or the contesting of such a liability.
10
1 Kissel, Caroline, (1929) 15 BTA 705 , later proceeding (1929) 15 BTA 1270 , acq in part
1929-2 CB 28, nonacq in part 1929-2 CB 66 .
2 Rev Rul 92-29 , 1992-1 CB 20 .
3 IR 92-36 , 4/8/92 .
4 Code Sec. 212(3) .
5 Reg § 1.67-1T(a)(1)(iii) .
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6 Walter, Alexander DeanJr., (1979) TC Memo 1979-132 , PH TCM ¶79132, 38 CCH TCM 594
.
7 Holland, Brian, (1985) TC Memo 1985-626 , PH TCM ¶85626, 51 CCH TCM 164, affd (1987,
CA9) 60 AFTR 2d 87-5658 , 828 F2d 562, 87-2 USTC ¶9531 .
8 Goodnight, Gary, (1987) TC Memo 1987-604 , PH TCM ¶87604, 54 CCH TCM 1272 .
9 IRS Letter Ruling 9234009 .
10 Chief Counsel Advice 202050015 .
END OF DOCUMENT –
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