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Failure To Keep Business Records Can Be Expensive - By John R. Bullis

Updated: Feb 21, 2023

Mr. Najafpir was audited by IRS and found to have under reported the gross receipts from his sole owner business of a California smog check station in 2009 and 2010.

Since he did not have a general ledger, or a profit or loss statement and he did not introduce as evidence in the Tax Court trial any of his invoices, the IRS was allowed to use the bank deposits as best evidence of his gross receipts. The court did allow that four of the deposits were not income but came from cash on hand at the end of 2008.

IRS found his taxable income for 2009 and 2010 should be increased by $38,200 in 2009 and increased by $22,001 in 2010.

The Tax Court found Mr. Najafpir’s testimony to be credible. However, since he did not provide any evidence regarding the bank deposits (except for four deposits) the remaining bank deposits for 2009 an 2010 were found to be additional taxable income.

Mr. Najafpir did not hire a tax attorney but represented himself in the Tax Court. (That may have been a mistake. He probably should have settled the matter with IRS and not gone to Tax Court.)

The case was complicated a bit by his request for a deduction to store his business records and related parts in a garage that was not attached to his main business location. The court did not allow the deduction for Office in home because of the wording of Code Section 280A(f)(1)(A). (He probably could have claimed a regular business expense deduction instead of Office in Home).

Every individual that has a business is required to keep books and records to establish the amount of his or her gross income. Since he only kept his invoices and did not maintain regular business records, the IRS was allowed to use the bank deposits as best evidence of his gross income.

The QuickBooks computer accounting program is a bit difficult to learn but it has helped many business owners. A little assistance in getting it started and learning how to use it is not expensive. Good business records can avoid IRS problems and also give you an understanding of how the business is really doing and even help you operate it more profitably.

It is hard to beat someone at their business. He probably should have settled the matter with IRS. Then when he went to Tax Court, it was probably a mistake to try to represent himself.

Did you hear “It is important to acknowledge a mistake instantly, correct it and learn from it. That literally turns a failure into a success. Success is on the far side of failure.” T.J. Watson-Founder of IBM

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