In Uncategorized on 11/08/2011 at 16:21

It always stings to see a fellow tax professional upended, even when it’s his or her own fault. But this case approaches the limits of tolerance for human frailty, because Linzy puts her own neck in the noose. I’m referring to Joyce Ann Linzy, 2011 T.C. Mem. 264, filed 11/7/11.

Linzy has her own tax preparation business. She claims she employs “contract labor”, but has no records of any value showing to whom she paid what. Judge Vasquez takes up the story: “Petitioner presented canceled checks, bank account statements, receipts, and invoices purporting to substantiate various items claimed as business expense deductions. These records are not well organized and have not been submitted to the Court in a fashion that allows for easy association with the portions of deductions that remain in dispute. Nevertheless, we make what sense we can with what we have to work with….” 2011 T.C. Mem 264, at p. 7.

It gets worse. “None of the numerous receipts petitioner offered in support of her claimed contract labor expense were for contract labor.[Footnote- For example, petitioner introduced receipts for blinds, carpet, repairs, and furniture.] However, some of the receipts were for valid business expenses properly deductible elsewhere on petitioner’s Schedule C. We permit those expenses to be deducted and discuss them below in the appropriate expense category.

“At trial petitioner attempted to claim a deduction for additional contract labor expenses. Petitioner introduced photocopies of checks and a few pages of someone’s handwritten timesheet. The checks are photocopied such that the dates are missing or incomplete, and the full amount cannot be determined for one of the checks. These records are incomplete, and there is not enough information to permit a reasonable estimate. Accordingly, respondent’s complete disallowance of petitioner’s $34,880 deduction for contract labor is sustained.” 2011 T.C. Mem. 264, at pp. 7-8.

Though Judge Vasquez throws Linzy a few dollars’ worth of deductions above what IRS would allow in the other categories referred to, the net result sustains IRS’s deficiency.

Finally, as to the Section 6662 penalty (negligence and substantial understatement), Judge Vasquez had this to say:  “Petitioner’s records were insufficient to substantiate several of her claimed deductions, and she failed to keep adequate books and records. Furthermore, petitioner, a tax return preparer with more than 15 years’ experience, improperly deducted the cost of numerous items instead of depreciating the items as required by law. Although petitioner credibly testified as to the business purpose for her claimed deductions, her underpayment was still attributable to her negligence.” 2011 T. C. Mem. 264, at pp. 18-19.

Apparently Linzy was an unenrolled preparer, a species about to become extinct with the advent of the new Registered Tax Preparer testing and CPE requirements, and Circular 230 regulation. It remains to be seen whether the proposed testing and CPE requirements, and the oversight of OPR, will improve the performance of Linzy and her colleagues–at least as to their own tax returns.

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