[TaxByte] Unreported Income, Unsubstantiated Deductions, Late Filing – Three Strikes and Taxpayer Loses

Unreported Income, Unsubstantiated Deductions, Late Filing Three Strikes and Taxpayer Loses

Paulette Thompson and Johnnie Thompson v. Comm., TCM 2024-14

The Thompsons earned income from farming operations raising and selling cattle, chickens, eggs, and turkeys. Mrs. Thompson also earned income from a tax preparation business (which earned her a space in this tax update manual). IRS prepared SFRs for 2014, 2015, and 2016. Mrs. Thompson mailed a 2014 tax return to the IRS on April 16, 2018. She provided her 2015 and 2016 returns to an Appeals officer in February 2019. IRS did not process the returns for 2014 2016. Income from her tax preparation business was reported on Schedule F as Custom Hire (Machine Work) Income.

Gross income from farming activities between $350,000 and $500,000 was not contested by the Thompsons. Nor was income from tax preparation of about $60,000 each year. At trial, the income amounts were confirmed by the taxpayer. Deductions for insurance and feed were allowed by the IRS, but in amounts less than what Mrs. Thompson wanted to claim. She did not provide any substantiation for the additional amounts, and the Court did not allow deductions beyond what the IRS had already allowed.

Deductions for Contract Labor Were Disputed

Thompson claimed deductions for contract labor of $218,400, $204,414, and $153,123 for years 2014, 2015, and 2016, respectively. The IRS allowed $126,639 for tax year 2014. No deductions for contract labor were allowed for 2015 or 2016. To support the deductions, Mrs. Thompson testified that payments made to her daughter, as shown in her bank statements, substantiated her contract labor expenses. Those payments were commingled with others in her bank account. Her testimony could not distinguish the payments made to her daughter specifically for contract labor. The evidence Mrs. Thompson presented in support of the business purpose of these claimed deductions consisted only of her self-serving testimony and uncorroborated documents. The court stated, We are under no obligation to accept uncorroborated and self-serving testimony, citing Higbee v. Comm., 116 TC 438, 455 (2001) and Tokarski v. Comm., 87 TC at 77.

Late Filing Penalties Were Sustained by the Court

There was no dispute that the returns were all filed late, or not at all, causing the IRS to prepare substitutes for returns for 2014-2016. Mrs. Thompson only had some self-serving testimony, but no evidence that the failure to file the returns was due to reasonable cause and not due to willful neglect. The fact that she was preparing income tax returns during the years in question made it a quick jump to sustaining the imposition of the penalties.

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