in-20260930-IR-045260335NRA: LETTER OF FINDINGS: 01-20251176

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251176 Individual Income Tax For The Tax Year 2023 HOLDING Taxpayer failed to establish that the Department's assessment of additional income tax was incorrect. ISSUE

I. Individual Income Tax - Burden of Proof.

Authority: I.R.C. § 62; I.R.C. § 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.3d 846 (7th Cir. 2000); Indiana 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 334: Tax Guide for Small Business (For Individuals Who Use Schedule C) (2023); INTERNAL REVENUE SERVICE, Topic no. 305, Recordkeeping; About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), Internal Revenue Service; Schedule C, Indiana Department of Revenue; IT-40 Tax Booklet (2023). Taxpayer protested the Department's assessment of additional income tax. STATEMENT OF FACTS Taxpayer is an Indiana resident who filed a 2023 Indiana Full-Year Resident Individual Income Tax return ("Form IT-40"). After review, the Indiana Department of Revenue ("Department") issued a Notice of Proposed Assessment for additional individual income tax. Taxpayer protested the assessment. An administrative hearing was held in which Taxpayer explained the basis for the protest. This Letter of Findings results. Additional facts will be provided as necessary.

I. Individual Income Tax - Burden of Proof.

DISCUSSION Taxpayer filed Form IT-40 for the tax year 2023. After review, the Department adjusted Taxpayer's adjusted gross income on the return, disallowing the Schedule C income and expenses. The adjustment resulted in an assessment for additional Indiana income tax. Taxpayer protested the assessment and explained that he had sole proprietorship business income and expenses in addition to his full-time employment. During the protest review, Taxpayer provided an amended return to correct his vehicle deductions and mileage. 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, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (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, 583 (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). IC 6-8.1-5-4(a) requires that "[e]very person subject to a listed tax must 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." The person also "must allow inspection of the books and records and returns by the [D]epartment or its authorized agents at all reasonable times." IC 6-8.1-5-4(c). If Schedule C deductions are taken at the federal level, a taxpayer will usually also take the same deductions at the state level. Schedule C (Form 1040) is used to report income or loss by small businesses and professionals who operate as a sole proprietor. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), Internal Revenue Service, https://www.irs.gov/forms-pubs/about-schedule-c-form-1040 (last visited May 14, 2026). The Department will review a Federal Schedule C for sole proprietorship income and loss. Schedule C, Indiana Department of Revenue, https://www.in.gov/dor/resources/fraud-prevention/schedule-c/ (last visited May 14, 2026). Schedule C is part of Indiana tax returns, and businesses must keep records to show all income and expenses reported on Schedule C. Id. 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." I.R.C. § 62(a)(1); I.R.C. § 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 field of business. A necessary expense is one that is helpful and appropriate for your business." Internal Revenue Service, Publication 334: Tax Guide for Small Business (For Individuals Who Use Schedule C) (2023) at page 30, https://www.irs.gov/pub/irs-prior/p334--2023.pdf. If a taxpayer purchases tangible personal property, such as supplies, only when the taxpayer uses the property for business purposes, is the taxpayer permitted to deduct the cost of such use. "Internal Revenue Code provisions dealing with deductions, exemptions, and exclusions are matters of legislative grace." Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). The taxpayer who claims such deduction must maintain adequate records to substantiate it. See Topic no. 305, Recordkeeping, https://www.irs.gov/taxtopics/tc305 (last visited May 14, 2026). The Department's initial review of Taxpayer's 2023 tax return showed that his income and expenses were unsubstantiated due to a lack of verifiable documentation. Taxpayer's tax preparer explained that the tax preparer's software incorrectly applied both depreciation and mileage from vehicle expenses related to the Scheule C business. Taxpayer requested to submit an amended return to correct this. Taxpayer submitted an amended return but there remained expenses and depreciation with no documentation to support it. The Department requested documents to support Taxpayer's Schedule C expenses multiples times and he failed to provide any additional information. Therefore, Taxpayer has failed to provide any documentation to support his car and truck expenses, depreciation, supplies, and other expenses. Taxpayer has not met his burden imposed under IC 6-8.1-5-1(c). Taxpayer's protest is denied. FINDING Taxpayer's protest is denied. July 24, 2026 Replaces Finding Document: New