Courts have broad powers in tax disputes that sometimes can work to your benefit. Even if you do not have precise records of a business expense, a judge may approximate the amount and at least give you a partial deduction. However, you need to give the court something to work with...some evidence supporting your deduction. The Tax Court recently came down hard on a taxpayer who proved to keep inadequate business records.

In a recent Tax Court case, a small business owner, a locksmith, deducted more than $20,000 as ordinary business expenses. These included payments to his brother as an independent contractor, business use of a truck, and a home office. The IRS denied these deductions and the locksmith turned to the Tax Court for help.

Business deductions, the court reminded the locksmith, are not automatic. They must be substantiated and without adequate evidence, they can be denied.

However, courts have the power to approximate amounts when evidence of the exact amount is missing. Nothing in the law requires a court to approximate expenses and when it does, it can take into account the circumstances surrounding the absence of records.

The locksmith claimed that he paid his brother $12,000 in commissions. However, his only evidence was his check register. It showed that he had written checks to his brother totaling $4,000. The court, without having any other evidence of payment, allowed the locksmith to deduct only the amount recorded in his check register.

The court had an even larger problem with the locksmith’s vehicle expenses. He had no evidence of business use…no logs, diaries, account books or any evidence to show that he had used his truck for business expenses. Without any evidence the court could not approximate the amount.

The locksmith claimed that he used the garage at his home as an office. He kept supplies and equipment there. The court accepted his testimony as true but it found that the garage was not his principal place of business. His work was done via house calls…he traveled to wherever his services were needed. Because the locksmith could not show that the garage was his principal place of business, the court disallowed the deduction.

Finally, the court reviewed the locksmith’s penalty for filing a late return. If an explanation of why a return is late is reasonable, a court may lessen or remove the penalty. The locksmith did not explain, the court could not invent a reasonable explanation and the penalty was enforced.