The Tax Court rejected the $24,775 in business deductions and upheld the $1,327.20 penalty. When the IRS then attempted to add on another $901.60 the Court simply said no. Why? The IRS had failed to obtain the correct signature.
Holding
Lance Stevens couldn't deduct his 2023 Schedule C expenses. The Court agreed with the IRS on the larger tax bill and the original penalty, but not on the additional penalty. The final numbers will be worked out under Rule 155 (which is just tax court speak for 'do the math later').
Why It Matters
The deduction result applies settled law. A taxpayer must support claimed expenses with evidence. Complaints about the audit process do not establish a deduction's amount or business purpose.
An IRS concession can increase the tax at issue. The IRS withdrew its proposed reduction of Stevens’s reported receipts. Restoring those receipts while denying the expense deductions increased the asserted deficiency.
The original penalty and a later increase require separate attention. Proof of approval for the original penalty did not establish approval for the additional amount asserted in litigation.
This opinion creates no precedent. Section 7463(b) bars review of the decision by another Court and prohibits treating this summary opinion as precedent in another case.
Key Facts
Stevens operated an appliance repair business and reported $64,000 in gross receipts for 2023. His return claimed $24,775 in Schedule C expenses:
Car and truck expenses: $15,323.
Insurance: $835.
Office expenses: $1,780.
Deductible meals: $1,765.
Utilities: $3,746.
Credit card processing fees: $1,326.
He also reported 22,467 vehicle miles and claimed an earned income credit and an additional child tax credit based on his reported net profit.
During the correspondence examination, the IRS proposed disallowing the expenses and reducing gross receipts by $9,968. The April 21, 2025 notice of deficiency determined $6,636 in additional tax and a $1,327.20 accuracy-related penalty. The examining technician’s immediate supervisor approved the original penalty on March 11, 2025.
The IRS later accepted the $64,000 of receipts Stevens had reported. It lodged an amended answer on April 3, 2026, seeking an additional $4,508 deficiency and an additional $901.60 penalty. The Court granted leave and filed the amended answer on April 9, 2026. Stevens agreed that his reported receipts were correct but did not concede the increased deficiency.
At trial, Stevens introduced no exhibits and offered no testimony to support the disputed deductions. His testimony focused on his objections to the examination process.
Statutory or Regulatory Framework
Sections 162 and 6001 require a business connection and adequate support for deductible expenses. Section 262 generally excludes personal, living, and family expenses.
The Cohan rule permits estimates of some deductible expenses when the record supplies a reasonable basis. Section 274(d) imposes stricter substantiation for passenger automobile expenses and qualifying travel expenses.
Section 6214(a) permits the Court to consider an increased deficiency properly asserted before or at the hearing. Rule 142(a)(1) places the burden on the IRS for an increase pleaded in its answer.
Section 6662(a) and (b)(2) impose a 20% penalty for an underpayment attributable to a substantial understatement. For an individual, the relevant understatement must exceed the greater of $5,000 or 10% of the tax required on the return.
Sections 7491(c) and 6751(b)(1) require the IRS to produce evidence supporting an individual’s penalty liability, including applicable written supervisory approval.
Arguments
Taxpayer argued:
The IRS hdidnot nnotifyhim of the audit or the need to provide expense documentation.
The examination process violated his rights.
The Court should not permit the amended answer seeking additional tax and penalties.
Government argued:
Stevens had not substantiated the Schedule C deductions.
His original $64,000 receipts figure was correct, supporting an increased deficiency after the IRS withdrew its receipts adjustment.
The original and additional accuracy-related penalties should apply.
Court’s Reasoning
The Court could consider the increased deficiency. The IRS asserted it in the amended answer, and Stevens had notice and an opportunity to respond. His return and acknowledgment of the receipts figure satisfied the IRS’s burden concerning that increase.
The ordinary expense categories lacked support. Stevens provided no testimony or documents to support the insurance, office, utilities, or processing-fee deductions. An estimate requires evidence that permits a reasonable calculation.
The vehicle deduction failed the stricter rules. Reporting an annual mileage figure did not establish the required business use. The applicable rules address amounts, mileage, dates, and business purpose.
The meals deduction failed under either possible standard. The record did not establish whether the claimed meals involved travel. The Court did not decide whether strict substantiation or the Cohan rule applied because Stevens supplied no supporting evidence under either approach.
The original penalty met the approval requirement. The IRS established that the immediate supervisor approved the $1,327.20 penalty in writing before formally communicating it to Stevens. Stevens offered no evidence showing that determination was incorrect.
The increased penalty did not meet the evidentiary requirement. The IRS neither argued nor established that an authorized supervisor approved the additional $901.60. The Court applied its cited authorities separately to the increased amount.
Reasonable cause did not change the result. Stevens did not assert that defense. The Court did not decide it, and the rejected increase required no reasonable-cause analysis.
Result
Bottom line: The Court told everyone to do the math under Rule 155. No deductions, bigger tax bill, original penalty stays, extra penalty. Lesson for the pros: take all your receipts with you for every single expense and check each penalty individually. You can win on the tax and still lose on the penalties. On the penalties.
List of Citations
I.R.C. §§ 162, 262, and 6001; Treas. Reg. §§ 1.162-1(a) and 1.6001-1: Business-expense eligibility and supporting records.
I.R.C. §§ 274(d) and 280F(d)(4); Temp. Treas. Reg. § 1.274-5T: Strict substantiation for specified expenses.
I.R.C. §§ 6214(a) and 7491; Tax Court Rule 142(a): Increased deficiencies and burdens of proof and production.
I.R.C. §§ 6662(a), (b)(2), (d)(1)(A), and 6751(b)(1): Substantial-understatement penalties and supervisory approval.
I.R.C. § 7463(b): No appeal and no precedential use of this summary opinion.
Tax Court Rule 155: Computation of the decision amount.
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), and Vanicek v. Commissioner, 85 T.C. 731 (1985): Estimates require an adequate evidentiary basis.
Sanford v. Commissioner, 50 T.C. 823 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969): Strict substantiation overrides estimation.
Higbee v. Commissioner, 116 T.C. 438 (2001): The IRS’s penalty burden of production.
Bass v. Commissioner, T.C. Memo. 2023-41, and Walker v. Commissioner, T.C. Memo. 2022-63: Approval requirements applied by the Court to the original and increased penalties.