I’ve recently chronicled the mishaps of petitioners with too little paper to substantiate their claimed deductions, adjustments, and credits. But too much paper is as bad. Just ask Carol A. Wright, et al. , T. C. Sum. Op. 2024-9, filed 6/10/24. The als are her ex-Steve, and his current Tami. Among them are a real estate construction entity and a café, fetchingly named Love At First Bite. These generate many and diverse deductions and adjustments (COGS).

The problem is substantiation. IRS concedes chops and some items, but Judge James S. (“Big Jim”) Halpern, confronted with the shoebox gambit (masses of credit card receipts, bank statements, restaurant meal check stubs. etc., “wretched, crinkled, scrawled over, blotched, frowsy”) has had enough.

“We need not (and will not) undertake the task of sorting through the voluminous Exhibits petitioners have provided in an attempt to see whether they have provided adequate substantiation to counter respondent’s adjustments.” T. C. Sum. Op. 2024-9, at p. 14.

Judge Big Jim asked Carol, Tami, and Steve at trial to give him a spreadsheet with items described. They gave him 34 (count ’em, 34) pages showing 278 (count ’em, 278) items, but the descriptions don’t pass Judge Bug Jim’s smell test.

“For many of the entries, the spreadsheet does not merely reproduce the annotations of the purpose handwritten on meal checks and credit card receipts but elaborates on those annotations or supplies text that is illegible on the original receipt.” T. C. Sum. Op. 2024-09, at p. 13.

“They offer a hodgepodge of receipts that left respondent unconvinced. They ask us to accept the receipts, bundled into separate exhibits for each disallowed expense, as substantiation that they spent some stated amount for the disallowed expense and that the expenditure constituted an ordinary and necessary business expense for the related activity (i.e., either [real estate] on [sic; probably “or”] one of the Schedule C activities). Petitioners’ approach brings to mind the shoebox method of presenting evidence.” T. C. Sum. Op. 2024-9, at p. 13 (Citations omitted).

Entrepreneurs are not CPAs, and should not be held to their standards. I once told a RA at Exam that I did not intend to be a bookkeeper, and if I had wanted to be I would have been. All that said, clear, easily decipherable records are the gold standard. Shoebox or RedWeld if you will (see my blogpost “The Shoebox RedWeld System,” 12/8/21), but be prepared to defend your recordkeeping with something better than “here’s a bunch paper.” (Hi, Judge Holmes).