The Law

IRS and Unsubstantiated Expenses by Ron Davis The owner of a failed business that was previously located at a shopping mall in Laurel, Maryland, has had to contend with serious accusations by the Internal Revenue Service. The charges: falsifying business expenses. The business is an African hair-braiding service, and the owner is a native of Senegal, African. That’s where she learned the braiding skills. And when she migrated to the United States several years ago, she chose to open a business in the Laurel area. Her clients were local residents of Laurel and the surrounding area. The shopping center location therefore seemed appropriate, and the salon that she opened she named Nanou’s African Braiding. She was aware that other hair-braiding businesses were already established at the chosen shopping mall. But that knowledge did not discourage her. She then created a marketing plan that seemed reasonable for her needs. Despite that plan, however, her business almost immediately faltered. In one year, she had only 15 customers. That’s when she closed the salon, and her landlord decided against prosecuting her for breach of her lease. That was not the end of her problems, however. The Internal Revenue Service eventually issued her a “notice of deficiency.” The IRS charged, among other allegations, that her deductions exceeded the salon’s income. She asked for a review of the charges. In that request, she argued that the IRS did not realize that she conducted her salon business with an “actual and honest objective of making a profit.” She added that she was thus entitled to claim deductions for the expenses of that business, just so long as she was able to substantiate them. But she admitted that she lacked substantiation for certain of those claimed business expenses. She also offered no documentation for her claimed meal expenses and did not show that meals were “an ordinary and necessary expense of her braiding business.” Moreover, she claimed a deduction for hair products used in the salon, but she did not substantiate the amount of the claim. Nor could she prove the claims that she used her telephone for business purposes that were associated with the operation of the salon. “In sum,” the court trying the matter stated, “we find that she has failed to substantiate the cost of supplies, hair product expenses, and business-related cell-phone expenses, the relevant tax requirements. We therefore impose a penalty upon the portion of any underpayment attributable to, among other things, negligence or disregard of rules or regulations.” The court concluded, “We find that the taxpayer was negligent in preparing her return and will therefore sustain an accuracy-related penalty on the portion of the underpayment attributed to the unsubstantiated expenses.” (Amy Ndiaye, Petitioner v. Commissioner of Internal Revenue, Respondent, Docket No. 18273-14, Filed April 2016.) Decision: April 2016 Published: April 2016