in-20250625-IR-045250292NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20242762 Individual Income Tax For The Tax Year 2023 HOLDING Individual failed to (i) properly maintain his service records, (ii) substantiate his Indiana’s Earned Income Credit, and (iii) affirmatively establish a reasonable cause for penalty abatement. As such, Individual was responsible for the tax assessment including penalty. ISSUE

I. Individual Income Tax – Burden of Proof.

Authority: I.R.C. § 61; I.R.C. § 62; I.R.C. § 162; IC 6-3-1-3.5; IC 6-3-2-1; 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); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); 45 IAC 15-11-2; Internal Revenue Service, Publication 334: Tax Guide for Small Business (For Individuals Who Use Schedule C) (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 and a barber who filed an Indiana return, Form IT-40 (“IT-40”), and requested a $18 refund for 2023. On his IT-40, Taxpayer claimed a $399 Indiana’s Earned Income Credit (“IN-EIC”), a tax credit. The Indiana Department of Revenue (“Department”) reviewed Taxpayer’s tax filing and disallowed Taxpayer’s IN-EIC. Such disallowance resulted in an assessment of tax, penalty, and interest. Taxpayer protested and submitted additional documents to support his protest. Taxpayer asked that the Department make the decision without an administrative hearing. This Letter of Findings ensues.

I. Individual Income Tax – Burden of Proof.

DISCUSSION The Department reviewed additional documents provided by Taxpayer and disallowed his $399 IN-EIC because the income reported in his IT-40 could not be verified. Taxpayer disagreed and argued that he was entitled to a $18 refund. The issue thus is whether Taxpayer demonstrated that the assessment was incorrect. 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). When the person subject to the listed tax fails to keep books and records, under IC 6-8.1-5-1(b), 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 the Department “reasonably believes that a person has not reported the proper amount of tax due.” 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). All tax assessments are prima facie evidence that the Department’s claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC 6-8.1-5-1(c). Importantly, “each tax year stands alone.” Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). The taxpayer is required to provide documentation to explain and support his or her challenge. When an agency is charged with enforcing a statute, jurisprudence defers 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). Poorly developed and 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). 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[.]” 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), 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. “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 March 20, 2025). During the initial review of Taxpayer’s tax filing, the Department found that Taxpayer reported $13,230 gross income and deducted $600 in expenses on a Schedule C – Profit or Loss From Business – to his federal return, Form 1040. In turn, Taxpayer claimed a $18 refund based on the IN-EIC, a tax credit that reduced his Indiana state and county income tax. In two separate letters, the Department requested that Taxpayer provide verifiable records to support his income and expense deduction: The Department noted “Customer cannot claim the same expenses multiple times. IF the same ‘supplies’ are being claimed twice, customer will need to amend to correct.” Because Taxpayer failed to provide verifiable supporting documents, the Department determined that Taxpayer did not qualify for, and disallowed, the $399 IN-EIC. The disallowance resulted in an assessment. Taxpayer protested and stated, in part: To support his protest, in addition to an Excel summary of his Barber Shop Appointments, Taxpayer provided copies of his 2023 federal return and schedules, two handwritten purchase order slips for a barber chair and two mirrors. As mentioned, Taxpayer here is a barber who provides haircut service to customers in Indiana. To claim the IN-EIC for 2023, Taxpayer was required to demonstrate that during 2023, he had earned income, which satisfied the statutory requirements. Taxpayer here reported that he had approximately $13,000 gross income and deducted $600 in expenses in the Schedule C to his federal return, Form 1040. To support his claim, Taxpayer provided two handwritten purchase order slips and the Excel summary, Barber Shop Appointments. Upon review, however, Taxpayer’s reliance of his supporting documentation is misplaced. First, Taxpayer’s Excel summary listed information of each appointment date, time of haircut service, and service charge per haircut. That Excel summary demonstrated – as it was called exactly – Taxpayer’s appointments with no information about each customer and the corresponding payment from each customer. Such information alone – without additional verifiable documentation, such as customer name, invoices, payment type, payment receipts, or his bank statement – was insufficient to substantiate Taxpayer’s gross income as claimed. Second, Taxpayer offered two handwritten purchase order slips to support his deduction for business expenses incurred in 2023. But both purchase order slips – which speak for themselves – demonstrated that Taxpayer ordered those items in 2024, not 2023. Regardless of accounting methods used, Taxpayer was not permitted to deduct such expenses in 2023 – one year earlier than his purchase orders – without evidence of actual payments for such orders. Finally, Taxpayer claimed that he “filed [his] taxes on time and should not be charge[d] late penalties.” Taxpayer was mistaken. As mentioned, the Department may assess 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). 45 IAC 15-11-2(b), in part, explains that “‘Negligence’ on behalf of a taxpayer is defined as the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer” and “shall be determined on a case by case basis according to the facts and circumstances of each taxpayer.” Only when “the taxpayer affirmatively establishes that the failure to . . . pay a deficiency was due to reasonable cause and not due to negligence,” the Department shall abate such penalty. 45 IAC 15-11-2(c). In this case, Taxpayer failed to properly maintain his business records of his haircut service. Taxpayer timely filed his tax return, but he failed to provide verifiable documents requested by the Department to substantiate that he qualified for the tax credit. The Department is not able to agree that such penalty should be abated without Taxpayer affirmatively establishing any reasonable cause. To conclude, Taxpayer failed to maintain adequate business records, as statutorily required, and failed to affirmatively establish the reasonable cause for penalty abatement. Taxpayer’s records with respect to his service at the barber shop and his Schedule C income and expense could not be verified. As such, Taxpayer did not qualify for the $399 IN-EIC and was responsible for the assessment attributable to the disallowance of that IN-EIC. FINDING Taxpayer’s protest is respectfully denied. April 4, 2025 Replaces Finding Document: New