in-20260422-IR-045260104NRA: LETTER OF FINDINGS: 01-20242059

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242059 Individual Income Tax For The Year 2022 HOLDING Individuals met their burden of proof by showing the Department's assessment was incorrect to the extent the Department will review Taxpayers' documentation in support of their Schedule C income and losses, and reevaluate their tax liability, accordingly. 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 6-3.1-21-6; IC 6-8.1-5-1; IC 6-8.1-5-4; Stinson Est. v. United States, 214 F.3d 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 334: Tax Guide for Small Business (For Individuals Who Use Schedule C) (2022); 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 (2022). Taxpayers protested the assessment of additional individual income tax. STATEMENT OF FACTS Taxpayers are a married couple, filing jointly in Indiana. Wife is a self-employed hairdresser, and when filing their Indiana return, Form IT-40 (“IT-40”), Taxpayers claimed Earned Income Credit (“IN-EIC”), a tax credit, on their Schedule C. The Indiana Department of Revenue (“Department”) reviewed Taxpayer's tax filing and disallowed Taxpayer's IN-EIC, resulting in an assessment of tax, penalty, and interest. Taxpayers protested and submitted additional documents to support their protest. A hearing was held, and this Letter of Findings ensues. Additional facts will be provided as necessary.

I. Individual Income Tax - Burden of Proof.

DISCUSSION The Department determined that Taxpayers owed additional individual income tax related to tax year 2022 due to Taxpayers having not submitted verifiable documentation to support credits claimed on their Schedule C. Taxpayers disagreed with the Notice of Proposed Assessment (“NOPA”) they received from the Department, and initiated a protest. In support, Taxpayers provided copies of documentation related to their business income and expenses. 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(a (effective until June 30, 2022). The Department notes that IC 6-3-2-1 was amended, effective July 1, 2022, and subpart (a) was recodified as subpart (b) for the second half of tax year 2022. 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 February 6, 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 February 6, 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) (2022) at page 30, https://www.irs.gov/pub/irs-prior/p334--2022.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 February 5, 2026). Pursuant to IC 6-3.1-21-6, Indiana allows for the Earned Income Tax Credit (“EITC”) for individual income tax. This statute maps out how this credit is administered, relying on Section 32 of the Internal Revenue Code for credit calculation. Id. An individual taxpayer's EITC is determined by a number of factors including income level and family status. The money acquired through the EITC is subject to federal income tax but is exempt from state income tax under IC 6-3.1-21-6. If certain criteria are met, such as a valid federal EITC and qualifying income levels, a taxpayer may also qualify for Indiana's EITC. Specifics details, including more information on the qualifying criteria and how to calculate the credit, can be found in the IT-40 Instruction Booklet for tax year 2022. The Department's initial review of Taxpayers' 2022 tax return showed that their income was unsubstantiated due to a lack of verifiable documentation. Taxpayers submitted documentation in support of their protest evidencing Wife's booth rent and tax preparation expenses, both of which the Department then allowed, reducing Taxpayer's assessment liability. Taxpayers also indicated they had unintentionally underreported Wife's booth rent, requesting the Department take this into account, as well; however, this error in reporting of booth rent will require Taxpayers to file an amended return and Schedule C reflecting the appropriate amount. Taxpayers later submitted additional documentation to support their argument that expenses for Wife's business supplies and a portion of her phone bill should also be allowed. The Department will review the additional documentation, which includes several receipts and statements reflecting supplies purchased for Wife's business as a hairdresser, and reevaluate Taxpayers' liability, accordingly. However, the Department reminds Taxpayers that in order to claim utility expenses, such as a phone bill, Taxpayers need to submit Internal Revenue Service Form 8829 and invoices that include account holder identification with their Schedule C. Therefore, Taxpayers will be allowed thirty (30) days from the date this Letter of Findings is issued to submit an Internal Revenue Service Form 8829 to the Hearing Officer. After that time, the Department will conduct its review of all available supplemental documentation and will make any warranted adjustments as established by the supplemental documentation. The Department will then review Taxpayers' return and will recalculate based on the results of the supplemental documentation review and will determine if Taxpayers do qualify for the EITC. The review and recalculation process will determine to what extent Taxpayers have met the burden of proving the proposed assessment wrong, as required under IC 6-8.1-5-1(c). FINDING Taxpayers' protest is sustained to the extent that the Department will review Taxpayers' documentation in support of their Schedule C income and losses, and reevaluate their tax liability, accordingly. February 18, 2026 Replaces Finding Document: New