That Obliging Jurist Judge David Gustafson echoes the Frank Silver and Irving Kohn 1922 opus (but they were concerned with bananas) when he allows deductions she didn’t claim to Mariatu T. Kolokoh, Docket No. 29859-13, filed 3/19/15, another off-the-bencher, for which I am grateful I didn’t have to wade through a ton of orders today.

Mariatu is fighting about her EITC, that fount of jealously-guarded Congressional largesse. She and IRS have sorted out her eligible relations and such other matters as impact her entitlement, but there remains the amount of Mariatu’s earned income, self-employment type.

Mariatu’s records aren’t of the best, and given she claims she ran a haircutting business out of her home, Judge Gustafson doesn’t expect her to put in a certified statement from a Big Four accounting firm. Anyway, Mariatu claims her clients pay mostly cash, which she spends on the way to the bank to deposit whatever’s left.

Apparently Judge Gustafson buys some of Mariatu’s tale, although the 1111 Constitution Ave, NW, crowd didn’t buy any of it.

“The IRS disputes Ms. Kalokoh’s claim that she earned revenue of $15,900. However, we are convinced by her testimony, her records, and her corroborating witness that she did conduct the business and earn the revenue. Her records leave something to be desired, but they are not wildly out of keeping with the modest scale of this home-based business.” Transcript, at pp. 5-6.

But Mariatu claimed only $500 in deductions. In fact, she spent $1,074.00 to buy hair, and took no deduction for home-office expenses.

But Mariatu used one-sixth of her home exclusively for her business, and had no other location. So Judge Gustafson updates Mariatu’s tax posture by checking out her home-related expenses, and allowing her a deduction for one-sixth thereof, against her self-employment income.

The reason: “Her earned income is not her gross income unreduced by related expenses but rather is ‘the amount of the taxpayer’s net earnings from self-employment for the taxable year (within the meaning of section 1402 (a))’. Sec. 32(c)(2) (A)(ii). The term ‘net earnings from self employment’ is explicitly defined as ‘the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business”. Sec. 1402(a). Thus, for this purpose deductions are not elective but in effect mandatory, since to waive deductions would be to overstate one’s earned income and potentially exaggerate her EITC claim.” Transcript, at p. 5. (Emphasis by the Court).

Takeaway– Preparers, when a client tells you they’re entitled to EITC, and claim self-employment income with no deductions, it’s time to kick the due diligence engine into high gear.