A Twist On A Penalty

I am looking at a tax case. There is no suspense or twist, but there was something at the end that caught my attention.

The case involves an Uber driver.

He deducted the following:

(1)  Vehicle expenses of $44,729

(2)  Travel expenses of $6,915

(3)  Repairs and maintenance of $5,345

(4)  Insurance of $3,349

(5)  Cleaning expenses of $751

I am not seeing a whole lot of technical here. Hopefully he kept documentation and receipts. Just sort, label, copy and provide to the IRS.

But the story goes chippy.

(1) The travel expenses were for trips to Florida seeking medical treatment.

COMMENT: So this is not a business deduction. It instead is a medical deduction, which he might not be able to use if he doesn’t have enough to itemize.

               He provided no documentation for these trips.

(2)  He had nothing to support the repairs and maintenance.

Odd. One would have thought he had a primary garage, and that garage could provide a printout. It might not account for every dollar deducted, but it should be a good chunk.

(3)  He did not provide documentation for the insurance, not even the name of the insurance company.

This is getting strange. I am beginning to wonder if he is a protester.

(4)  It turns out that the cleaning was dry cleaning. That may or may not be deductible, hinging on whether he was dry-cleaning a uniform. I am, for example, unable to deduct my dry cleaning, but then I do not wear a uniform.

Again, he offered no documentation.

(5)  I am curious about the vehicle expenses. Forty-four grand is a lot.

Turns out he deducted approximately 70,000 miles.

Problem is, he drove only 9,439 miles as an Uber driver.

Oh, oh.

On top of that he deducted both actual expenses and mileage.

No can do.

The IRS wanted almost $18,000 in tax.

I am not surprised, considering that the disallowance of the deductions swelled both his income tax and self-employment tax simultaneously.

The IRS also wanted a substantial-understatement penalty of almost $3,600.

COMMENT: This penalty applies when the additional tax due is more than the larger of $5,000 or 10% of the corrected tax liability (before any payments). The penalty is 20%, and it hurts.

Frankly, I am thinking he is doomed. He does not have a prayer, having provided no documentation for his expenses, even the easy documentation.

Twist: this penalty has to be approved by an IRS supervisor.

Happens all the time.

But the IRS failed to submit evidence to the Court that it was approved.

The IRS tried to reopen the record to submit said evidence.

Too late. The taxpayer had the right to object.

What would you do?

Of course. You object.

So did the taxpayer.

Without the evidence the Tax Court bounced the substantial accuracy penalty.

Mind you, he still owed tax of almost $18,000, but he did not owe the penalty.

The case for the home gamers is Semere Misgina Hagos v Commissioner.