Department of State Revenue Docket 250657 Other

in-20251126-IR-045250657NRA: DEPARTMENT OF STATE REVENUE

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Summary

Individual provided verifiable documents to support that the assessment was incorrect.

The agency’s own summary, as published.

The rule, in full

1,674 words as published, November 26, 2025. View the original →

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251230 Individual Income Tax For The Tax Year 2023 HOLDING Individual provided verifiable documents to support that the assessment was incorrect. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 32; I.R.C. § 61; I.R.C. § 62; I.R.C. § 162; I.R.C. § 1402; IC 6-3-1-3.5; IC 6-3-2-1; IC 6-3.1-21-6; IC 6-8.1-5-1; IC 6-8.1-5-4; IC 6-8.1-10-2.1; Stinson Est. v. United States, 214 F.3d 846 (7th Cir. 2000); Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64 (Ind. 2009); Express Scripts Inc. v. Indiana Dep’t of State Revenue, 170 N.E.3d 273 (Ind. Tax Ct. 2021); Wendt LLP v. Indiana Dep’t of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Internal Revenue Service, Publication 334: Tax Guide for Small Business (For Individuals Who Use Schedule C) (2023); Internal Revenue Service, Publication 596: Earned Income Credit (EIC) (2023); Internal Revenue Service, Topic no. 305, Recordkeeping.  Taxpayer protests the proposed assessment of individual income tax for 2023. STATEMENT OF FACTS Taxpayer is an Indiana resident who filed an Indiana income tax return (“IT-40”) for the tax year 2023. Taxpayer claimed that during 2023, she had income attributable to her Schedule C (Form 1040), Profit or Loss From Business. Taxpayer requested a refund based on an Indiana’s Earned Income Credit (“IN-EIC”). The Indiana Department of Revenue (“Department”) reviewed Taxpayer’s filing and disallowed her IN-EIC. The Department’s adjustments resulted in an assessment. Taxpayer paid the assessment under protest. A hearing was held. Taxpayer submitted additional documents to support her protest. This Letter of Findings ensues.

I. Individual Income Tax – Burden of Proof.

DISCUSSION The Department disallowed Taxpayer’s IN-EIC because her income and expenses attributable to her Schedule C could not be verified. Taxpayer, to the contrary, argued that she was entitled to claim the IN-EIC for the tax year 2023 because she had earned income as reported. The issue is whether Taxpayer’s documents demonstrated that the assessment was incorrect.

A. The Applicable Law

IC 6-8.1-5-4(a) states 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). The Department “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment” if it “reasonably believes that a person has not reported the proper amount of tax due[.]” IC 6-8.1-5-1(b). Such assessment includes a ten percent penalty if the taxpayer “incurs, upon examination by the department, a deficiency that is due to negligence.” IC 6-8.1-10-2.1(a)(3). Importantly, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). Notices of proposed assessment issued by the Department are prima facie evidence that the Department’s assessments are correct; the burden of proving the assessment is incorrect rests with the taxpayer. IC 6-8.1-5-1(c). Poorly developed or non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep’t of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). When submitting evidence as part of his or her protest, the taxpayer needs to specify and explain the portions of the evidence that he or she believes to be relevant. As the Indiana Tax Court has previously noted (in the context of a summary judgment motion): “the Court will not consider” exhibits “on the off chance that it might find, on its own and undirected, some fact that supports” a claim, and “the Court is not required to search for specific facts on which” a party relies. Express Scripts Inc. v. Indiana Dep’t of State Revenue, 170 N.E.3d 273, 279 (Ind. Tax Ct. 2021). When an agency is charged with enforcing a statute, courts defer to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dep’t of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Additionally, Indiana imposes an adjusted gross income tax on all residents. IC 6-3-2-1. An Indiana resident taxpayer’s income is determined by starting with the federal adjusted gross income and making certain adjustments. IC 6-3-1-3.5. The Indiana statute refers to the Internal Revenue Code to compute what is considered the taxpayer’s Indiana income tax. I.R.C. § 61(a) provides that gross income includes “all income from whatever source derived[.]” Thus, for both federal and Indiana income tax purposes, profits attributable to the taxpayer’s trade or business are income subject to income tax pursuant to I.R.C. § 61. A taxpayer may be able to claim certain deductions, such as deductions under I.R.C. § 62, to reduce his or her income from the income-producing activities attributable to his or her Schedule C. In addition, after computing the taxable income and income tax due, a taxpayer may be able to claim a tax credit, such as an earned income tax credit under I.R.C. § 32 or IC 6-3.1-21-6(a), to reduce the taxpayer’s income tax. Similar to exemptions and deductions, tax credits are “matters of legislative grace.” Stinson Est. v. United States, 214 F.3d 846, 848 (7th Cir. 2000). As such, the taxpayer bears the burden of proof to substantiate his or her claim for such tax exemptions, deductions and credits. To that end, the taxpayer is required to provide documentation to explain and support his or her claim. Where such exemption, deduction, or credit is claimed, “the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law.” Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 100 (Ind. Ct. App. 1974). To claim an earned income credit under I.R.C. § 32 or an IN-EIC under IC 6-3.1-21-6(a), the claimant must demonstrate that he or she has earned income from working for someone as an employee or being self-employed. See Internal Revenue Service, Publication 596: Earned Income Credit (EIC) (2023), available at https://www.irs.gov/pub/irs-prior/p596--2023.pdf. Such earned income may include (i) wages, salaries, tips, and other taxable employee pay, (ii) net earnings from self-employment, or (iii) gross income received as a statutory employee. Id. Specifically, “net earnings from self-employment” is defined as “the gross income derived from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business . . . . ” I.R.C. § 1402(a). Therefore, if a taxpayer is self-employed (Sole Proprietorship), to properly claim that he or she has earned income and qualifies for the earned income credit based on Schedule C, Profit or Loss from Business, the taxpayer must document and substantiate such income and related expenses concerning his or her business income and expenses. See 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), https://www.irs.gov/pub/irs-prior/p334--2023.pdf. If the 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. 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 August 6, 2025).

B. The Initial Review and Proposed Assessment

During an initial review, the Department found that Taxpayer claimed an IN-EIC, which reduced her Indiana income tax resulting in a refund. Because Taxpayer’s claim was based on income from her Schedule C, the Department requested that Taxpayer provide verifiable records to substantiate the income and related business expense deduction concerning her trade or business. The Department noted that it could not determine the earned income as claimed by Taxpayer because Taxpayer did not provide adequate “documentation to validate the reported [adjusted gross income], which includes business income/loss.” The Department disallowed Taxpayer’s IN-EIC. Such disallowance resulted in an assessment.

C. Taxpayer’s Protest

Taxpayer claimed that the Department erred in disallowing her IN-EIC. Taxpayer stated that in 2023, she provided professional services to customers and received payments. Taxpayer asserted that she qualified for the IN-EIC because she had earned income and had two dependents. To support her protest, Taxpayer provided additional supporting documents, including her business profile, her Indiana professional license, her certification, an appointment calendar for 2023 and mileage logs, and a receipt book.

D. Analysis

As mentioned, to properly claim the IN-EIC, Taxpayer here was required to demonstrate that during 2023, in addition to having qualified dependents, she had earned income that satisfied the statutory requirements. The IN-EIC in question was based on Taxpayer’s income derived from the income-producing activities outlined in her Schedule C. As such, Taxpayer must substantiate that she carried a trade or business in 2023 and had both income and expenses carrying on such trade or business. Upon a review of Taxpayer’s supporting documents and given the totality of the circumstances, the Department is prepared to agree that Taxpayer met the burden of proof under IC 6-8.1-5-1, demonstrating that the assessment was incorrect. The Department will conduct a supplemental review and recalculate Taxpayer’s IN-EIC based on the additional supporting documentation submitted. FINDING Taxpayer’s protest is sustained. August 15, 2025 Replaces Finding Document: New

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