in-20260826-IR-045260289NRA: LETTER OF FINDINGS: 01-20251882

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251882 Individual Indiana Income Tax For The Year 2023 HOLDING Taxpayers met their burden of proof showing the Department’s assessment was incorrect. ISSUE

I. Individual Income Tax – Assessment.

Authority: IRC § 62; IRC § 162; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3-2-2; IC 6-8.1-5-1; IC 6-8.1-5-4; Stinson Est. v. United States, 214 F.2d 846 (7th Cir. 2000); Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Internal Revenue Service, Publication 535, Business Expenses (2022). Taxpayers protest the assessment of additional individual income tax for tax year 2023. STATEMENT OF FACTS Taxpayers are a married couple, Indiana residents, and file their return as married filing jointly. For tax year 2023, Taxpayers filed their Indiana Full-Year Resident Individual Income Tax Return (“Form IT-40”). The Indiana Department of Revenue (“Department”) reviewed Taxpayers’ return and determined that Taxpayers had more federal adjusted gross income (“FAGI”) than what was reported on their Indiana IT-40. As a result, the Department issued a Notice of Proposed Assessment for additional income tax. Taxpayers disagreed with the assessment and submitted a protest. Taxpayers requested resolution with a hearing. This Letter of Findings is based upon information available to the Department and provided by Taxpayers. Additional facts will be provided as necessary.

I. Individual Income Tax – Assessment.

DISCUSSION The Department determined that Taxpayers had more AGI than what was reported on their Form IT-40 and assessed additional income tax, penalty, and interest. The Department’s adjustments were directly related to information Taxpayers reported on Schedule C as business income and expenses related to Husband’s business. Taxpayers protested the assessment and provided copies of their 2023 federal return and schedules along with other related documentation for Husband’s business. As a threshold issue, it is the taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence that the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made. Id.; See e.g., Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007). An assessment, including taxpayer’s penalty assessment, is therefore presumed valid. A taxpayer must provide documentation explaining and supporting that the Department’s position is wrong. Additionally, “[W]hen [courts] examine a statute that an agency is ‘charged with enforcing . . . [courts] defer to the agency’s reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.’” Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014). Indiana imposes a tax “upon the adjusted gross income of every resident person, and on that part of the adjusted gross income derived from sources within Indiana of every nonresident person.” IC 6-3-2-1(b). IC 6-3-2-2(a) outlines what is income derived from Indiana sources and subject to Indiana income tax. There is a presumption that a taxpayer files his/her federal income tax return as required by the Internal Revenue Code. Thus, to effectively compute what is considered a taxpayer’s Indiana income tax, Indiana law refers to the Internal Revenue Code. IC 6-3-1-3.5 provides a starting point in determining a taxpayer’s taxable income and calculating what would be his/her Indiana income tax after applying certain additions and subtractions, with any necessary modifications following. Modifications are outlined in IC 6-3-1-3.5(a). A taxpayer who is in a trade or business may be able to claim deductions “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” IRC § 62(a)(1); IRC § 162. “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” Internal Revenue Service, Publication 535, Business Expenses (2022), available at https://www.irs.gov/forms-pubs/guide-to-business-expense-resources (last visited June 10, 2026). “Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are matters of legislative grace.” Stinson Est. v. United States, 214 F.2d 846 (7th Cir. 2000). Taxpayers are required to “keep books and records so that the [D]epartment can determine the amount, if any of the person’s liability for that tax by reviewing those books and records. The records . . . include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.” IC 6-8.1-5-4(a). The Department’s adjustments related to Taxpayers’ Schedule C business income and expenses. Specifically, the Department noted Husband’s business had no income in 2023 while still incurring significant expenses. The Department requested additional information, which Husband provided to the Department. Husband explained that while he was an employee of an organization, he also sought to supplement his income by engaging in work unrelated to income documented on his W-2. Husband attempted to collect payment for the agreed upon supplemental compensation, but one source simply did not pay him while another source stated they did not have the funds to pay him. The work entailed working from Husband’s home office, travel expenses and lodging expenses. Consequently, Husband did not earn any income related to his supplemental work; however, he still incurred expenses related to performing the supplemental work. Taxpayer had taken deductions on his Schedule C which were not justifiable during the Department’s audit. Taxpayer’s Schedule C return showed zero income with approximately $17,000 in expenses. Husband provided documentation including emails for contracted work, licensing fees, and receipts. Taxpayer was able to show that he was hired for work unrelated to his W-2 income and for which he was not paid. This work entailed use of his home office and overnight hotel expenses, including travel in his personal vehicle. After review, it is clear the documentation provided substantiated Taxpayers’ return and Schedule C were correct as originally filed. Due to the unique situation of tax year 2023, Husband had no income for his supplemental work but still had expenses. Taxpayer established that the claimed expenses met the requirements of IRC § 62(a)(1) and IRC § 162. Therefore, Taxpayer has met the burden imposed under IC 6-8.1-5-1(c) of proving the proposed assessment wrong. Taxpayers’ protest is sustained. FINDING Taxpayers’ protest is sustained. June 24, 2026 Replaces Finding Document: New