CPA Allowed Deductions as Determined; Accuracy-Related Penalties Imposed (Kilpatrick, TCM)

CCH Tax Day Report

A Certified Public Accountant (CPA) was not entitled to deductions in excess of those allowed by the IRS; accuracy-related penalties were imposed. In an attempt to substantiate his expenses in excess of those allowed by the IRS, the individual provided various documents including, receipts, bank statements, credit-card statements, invoices, check images, calendars, MapQuest directions and copies of travel-reservation confirmations. However, none of the records he produced provided adequate substantiation for his claimed deductions.

The individual’s calendar and MapQuest directions were prepared at least a year after the CPA used his car for business travel. Therefore, neither item was an adequate record of the amount of business mileage, the date of use, or the business purpose of the vehicle’s use. Since the individual failed to adequately substantiate his alleged automobile expenses, he was not entitled to an automobile expense deduction in excess of the amount allowed by the IRS.

The individual was not entitled to deduct the purchase of two chairs, a desk, a crystal chandelier, a desk lamp, two framed pictures, two paintings, a laptop computer or decorative bowls. Amounts paid to acquire real or personal tangible property are capital expenditures, which are not ordinary expenses and, therefore, not deductible under Code Sec. 162. Further, the individual was not entitled to depreciation deductions for the items because they were antiques that would retain their value. In addition, he was not entitled to deduct various purchases from an office supply vendor, internet service or a clock.

The individual was not entitled to deduct amounts paid for conferences, postage or telephone. The individual could have sought reimbursement for all conference expenses from his employer and he failed to substantiate the business use of his cellphone. However, for the second year, the individual was entitled to a deduction for potted plants he gave to his clients and the amount allowed by the IRS for home office internet.

The individual was liable for accuracy-related penalties. The individual conceded at trial that he was not entitled to all of the itemized deductions he claimed on his returns that were disallowed by the IRS. In addition he failed to keep adequate books and records to substantiate the expenses underlying his business deductions. His failure to substantiate expenses underlying the deductions at issue and his admission before trial that other deductions were improper were both evidence of negligence. Moreover, the individual, an experienced CPA who had prepared returns for many years, failed to show he had reasonable cause and acted in good faith with respect to any portion of the underpayment.

S.D. Kilpatrick, TC Memo. 2016-166, Dec. 60,687(M)

Other References:

Code Sec. 162

CCH Reference – 2016FED ¶8524.2504

CCH Reference – 2016FED ¶8550.2839

Code Sec. 167

CCH Reference – 2016FED ¶11,007.115

Code Sec. 263

CCH Reference – 2016FED ¶13,709.271

Code Sec. 274

CCH Reference – 2016FED ¶14,417.26

Code Sec. 6662

CCH Reference – 2016FED ¶39,651G.195

CCH Reference – 2016FED ¶39,651G.305

Code Sec. 6664

CCH Reference – 2016FED ¶39,661.654

Tax Research Consultant

CCH Reference – TRC BUSEXP: 24,806

CCH Reference – TRC PENALTY: 3,100

CCH Reference – TRC PENALTY: 3,106.05

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