Keep Records!

So here comes a recent decision of the Tax Court, showing once again the importance of maintaining defensible records, in support of your tax returns.  And you’ve got to wonder about some people, when you hear stories like that of taxpayer Schoppe.  Amazing to contemplate that he actually thought he could sell the Tax Court on his story.

His first mistake, of course, was representing himself, but that’s a discussion for another day.

The facts are pretty straightforward – Schoppe filed as a sole proprietor, with a number of real estate related activities, holding various business licenses.  He was a real estate agent, broker, consultant, appraiser, and an instructor of real estate licensing classes, as well as a financial planner and an insurance agent.

Whew – he was a busy fella!

Nevertheless, his recordkeeping skills seemed a little lacking.  He kept track of his expenses for each day on his calendar, and only by way of vague entries of amounts and payees at that.  F’rinstance:  “$15.95 Ho Jo”.  Close enough for jazz, he must have thought.

And his calendar contained only brief notations of his auto mileage for each day.  We guess the squares on his calendar, however, were not large enough, because they didn’t seem to ever contain any references to the business purpose for his expenses and mileage.

Further, our boy didn’t seem to think he had to timely file returns in his circumstances for the years at issue (2002 through 2007), so IRS made up returns for him, as they typically do, based on income information available to them.  And in so doing, the Revenooers showed uncharacteristic largesse in actually allowing some business expense deductions, not to mention a standard deduction and a personal exemption.

Now it really gets good – Schoppe eventually did submit returns for 2002, 2005, 2006, and 2007 reflecting substantial business expenses which offset the reported real estate related income, resulting in net losses.  His returns for 2003 and 2004 reported small amounts of net income from his businesses, offset by itemized deductions and the personal exemption.

And at trial, he stated that his particular business activities were “atypical,” and that his business expenses and itemized deductions fully offset his income, so he owed zero tax.  He told the Court that because he was confident he owed no Federal income tax and was “willing to forfeit” to the Government tax refunds, he didn’t worry about and therefore did not timely file his returns for 2002 through 2007.  He complained that the Revenooers’ audit and trial representatives “steamrolled” him and refused to accept the “obvious” business nature of all of his activities, claiming that essentially all of his expenses represented business expenses.

He argued that most real estate people pay their “agents” a commission of around 60%, but insisted that his business activities are not reflected by the norm, that his business model is “odd”, and that he is an “enigma.”  And on cross examination about the business or personal nature of expenses shown on his calendars and in his check register, Schoppe claimed, “So if it’s business or personal, it’s still a cost, and it’s mostly business because this is business.”

How persuasive.

Needless to say, the Court wasn’t particularly impressed, and therefore disallowed any of the business expense deductions claimed on the taxpayer’s untimely Federal income tax returns.

Bottom line – send about $100 grand as soon as possible, please.

This one should be a lesson to any of you who take lightly the importance of maintaining good records, and who may think a good story will convince IRS or other authorities that you are legit and on top of your financial affairs.

In general, bluffing will get you nowhere.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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