Department of State Revenue Docket 25-117 Other

in-20250326-IR-045250117NRA: DEPARTMENT OF STATE REVENUE

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Summary

Individual was responsible for additional Indiana income tax because Individual failed to substantiate her claimed business expense deductions.

The agency’s own summary, as published.

The rule, in full

1,685 words as published, March 26, 2025. View the original →

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20241641 Individual Income Tax For The Tax Year 2022 HOLDING Individual was responsible for additional Indiana income tax because Individual failed to substantiate her claimed business expense deductions. 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; 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); Internal Revenue Service , Publication 535: Business Expenses (2022); Internal Revenue Service, Topic no. 510, Business use of car; Internal Revenue Service, Topic no. 305, Recordkeeping. Taxpayer protests the proposed assessment of individual income tax for 2022. STATEMENT OF FACTS Taxpayer is an Indiana resident who timely filed her 2022 Indiana Full-Year Resident Individual Income Tax Return, Form IT-40 (“IT-40”). The Indiana Department of Revenue (“Department”) determined that Taxpayer had more federal adjusted gross income than what was reported in her Indiana IT-40. The Department concluded that Taxpayer owed additional Indiana and county income tax and, as a result, assessed Taxpayer additional tax, penalty, and interest. Taxpayer timely protested the assessment. Taxpayer requested 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 determined that Taxpayer had more federal adjusted gross income than what was reported in her IT-40. The Department assessed Taxpayer additional income tax, penalty, and interest. Taxpayer stated, in part: “[p]lease find [and] accept this letter as my protest notice, copy of . . . all supporting documents attached.” The issue thus is whether Taxpayer demonstrated that the assessment was incorrect.

A. The Applicable Law.

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.” 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 industry. A necessary expense is one that is helpful and appropriate for your trade or business.” Internal Revenue Service, Publication 535: Business Expenses (2022), available at https://www.irs.gov/pub/irs-prior/p535--2022.pdf. If the taxpayer purchases tangible personal property, such as a vehicle, only when the taxpayer uses the property for business purposes is the taxpayer allowed to deduct the cost of such use. “Generally, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986.” Internal Revenue Service, Topic no. 510, Business use of car, available at https://www.irs.gov/taxtopics/tc510 (last visited January 30, 2025). “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 deductions must maintain adequate records to substantiate them. See Internal Revenue Service, Topic no. 510, Business use of car, available at https://www.irs.gov/taxtopics/tc510 (last visited January 30, 2025); Topic no. 305, Recordkeeping, https://www.irs.gov/taxtopics/tc305 (last visited January 30, 2025).

B. The Initial Review and Proposed Assessment.

During the initial review of Taxpayer’s tax filing, the Department found that Taxpayer deducted approximately $36,000 in expenses on a Schedule C – Profit or Loss From Business – to her federal return, Form 1040. Taxpayer claimed an approximately $30,000 loss on her adjusted gross income as a result. The Department requested that Taxpayer provide verifiable records to support the claimed deduction, in relevant part: The Department reviewed Taxpayer’s supporting documents and disallowed the deduction concerning Taxpayer’s business expenses because the information could not be verified.

C. Taxpayer’s Protest.

To support her protest, Taxpayer in this case provided copies of her 2022 income tax returns, schedules, several invoices, a bill of sale for vehicle purchase, a statement of account for car insurance, as well as monthly statements for a mobile phone with unlimited talk and text, data, devices, and services. According to her 2022 tax filings, Taxpayer worked for a fulfillment business and received a W-2 for 2022. In addition, Taxpayer stated that she was in the cleaning and organizing service on her Schedule C and deducted a total of approximately $36,000 business expenses.

D. Analysis.

As mentioned, Taxpayer in this case stated that she was in the “cleaning and organizing service” business. Taxpayer asserted that she received $6,000 as income from her business and deducted approximately $36,000 in business expenses. The issue is whether Taxpayer demonstrated that she was entitled to deduct these expenses incurred in 2022. Upon review, Taxpayer’s reliance of the supporting documents is misplaced. First, Taxpayer did not maintain a general ledger, and her service start date was unknown. Taxpayer offered several handwritten invoices, which were dated in 2023 initially, and subsequently changed to 2022. Even if Taxpayer received those payments for her services provided in 2022, the total income Taxpayer reported on her Schedule C was less than the invoices provided. On the Schedule C, Taxpayer deducted (i) a new car purchase and sales tax, (ii) insurance premiums, (iii) subscriptions for mobile phone, data, and services, and (iv) tax preparation fees. This Letter of Findings addresses each, in turn, as follows: Taxpayer’s supporting documents failed to substantiate she was entitled to deduct one hundred percent purchase price of a new car and the associated sales tax because a vehicle was required to be depreciated according to Internal Revenue Service (“IRS”), in part: Taxpayer offered a statement of account to support the insurance expense, but the documentation failed to substantiate that Taxpayer was the policyholder, and the premiums were paid for her “cleaning and organizing service” business. Taxpayer’s supporting document showed that she was not the owner of that account. Taxpayer’s documentation showed that during 2022, she only had one mobile phone and did not use another phone to conduct her “cleaning and organizing service” business. Taxpayer’s records showed that during 2022, she had 1,875 calls and 10,347 messages under that phone number. Chapter 1 to the IRS Publication 535, in part, provides: As such, to claim this expense deduction, there is a rebuttable presumption that Taxpayer used that phone for personal purpose, and Taxpayer was required to document and to substantiate the proportionate business use of her personal phone. Taxpayer failed to do so. On her Schedule C, Taxpayer deducted $300 for federal and state tax preparation. According to the invoice, the preparation consisted of federal and state individual income tax returns, including a W-2, a 1098T, a 1098-MTG, and a Schedule C. Chapter 11 to the IRS Publication 535, in part, provides: Therefore, Taxpayer was only allowed to deduct a portion of the $300 that was related to preparing the Schedule C since that was the only portion of her tax return relating to her business as a sole proprietor. Taxpayer was not allowed to deduct the remainder because “[e]xpenses for completing the remainder of the return are miscellaneous deductions and are no longer deductible.” Taxpayer did not provide verifiable records to substantiate such a deduction. To conclude, Taxpayer’s reliance on her supporting documents is misplaced. To be deductible, the claimed business expenses must be both ordinary and necessary. When Taxpayer purchased and used an item for both personal and business use, Taxpayer was only allowed to deduct the cost of business use. Taxpayer was required to maintain adequate records to substantiate such use. Given the totality of the circumstances, in the absence of other verifiable documentation to substantiate the business expenses, the Department is not able to agree that Taxpayer met the burden of proof demonstrating that the assessment was wrong. FINDING Taxpayer’s protest is respectfully denied. January 31, 2025 Replaces Finding Document at: New

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