in-20260729-IR-045260230NRA: LETTER OF FINDINGS: 01-20251248

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 01-20251248 Individual Income Tax For the Year 2023 HOLDING Indiana couple 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 6-3.1-21-6; 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) (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). Taxpayers protested the Department’s assessment of additional income tax. STATEMENT OF FACTS Taxpayers are a married couple filing jointly in Indiana. Wife is employed in healthcare, and Husband makes apparel for local school corporations in Indiana. Taxpayers claimed credit for business expenses on their Schedule C. The Indiana Department of Revenue (“Department”) reviewed Taxpayers’ tax filing and disallowed Taxpayers’ Schedule C expenses as reported due to a lack of documentation in support of the expenses, resulting in the Department issuing Taxpayers’ a Notice of Proposed Assessment (“NOPA”) for additional income tax. Taxpayers disagreed with the Department’s assessment and submitted a protest to that effect. Taxpayers elected to pursue their protest without a hearing. This Letter of Findings is based on the information provided by Taxpayers, information available to the Department, and the tax laws of this state. 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 2023 due to Taxpayers having not submitted verifiable documentation to support credits claimed on their Schedule C. Taxpayers disagreed with the 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(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). 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 2023. The Department’s initial review of Taxpayers’ 2023 tax return showed that their income and expenses were unsubstantiated due to a lack of verifiable documentation. Taxpayers submitted documentation to the Department, which included a copy of their Form IT-40 Indiana Full-Year Resident Individual Income Tax Return (“IT-40”), emails stating Husband’s total sales for 2023, and the invoice for their 2023 tax preparation. Taxpayers also included receipts for a lawn mower, furniture, dishwasher, refrigerator, loan statements for the purchase of a sports car and a luxury SUV, window tinting, and garage storage cabinetry. In a letter to the Department, Taxpayers stated they also had contract labor expenses costing them nearly $25,000, property depreciation totaling just over $50,000, and other significant expenses. Taxpayers argue their returns and Schedule C claims are accurate as reported and that they are owed a refund of just under $1,500. Taxpayers have provided no explanation as to how the items and expenses claimed are ordinary and necessary in the production of apparel. As such, none of the items for which Taxpayers have provided invoices and receipts meet the requirements of qualifying business expenses under I.R.C. § 162 for Husband’s business. Furthermore, Taxpayers have failed to provide any documentation to support their depreciation, contract labor, and other expenses for nontangible services. Taxpayers have not met their burden imposed under IC 6-8.1-5-1(c). Therefore, Taxpayers’ protest is denied. FINDING Taxpayers’ protest is denied. May 18, 2026 Replaces Finding Document: New