Tax law and missing records: a match made in audit hell. This week, the Tax Court issued three reminders: if you can’t prove it, you probably don’t get to keep it. The IRS pieced together income from bank statements, nailed taxpayers for unreported wages, and tossed out business deductions they couldn’t back up. But even the IRS has to play by its own rules. In one case, they won the tax fight but lost the penalty because they skipped a step in their own process.
IRS sets federal tax interest rates for October 2026
Rev. Rul. 2026-19
The IRS rolled out the October 2026 federal rates: short-term clocks in at 4.25%, mid-term at 4.61%, and long-term at 5.22%. The §7520 rate is 5.60%. If you care about §382 ownership changes, the long-term tax-exempt rate is 3.95%.
Why It Matters:
AFRs affect related-party lending and certain below-market loans.
The §382 rate influences annual limitations on pre-change tax losses.
The §7520 rate affects valuations for estate, gift, and charitable planning.
Takeaway: The rates change monthly, but applying the wrong one can create consequences that last much longer.
Tax Court upholds unreported wages but declines to review disputed $3,000 tax payment
Summer H. El Deeb v. Commissioner, T.C. Memo. 2026-101
The Tax Court said yes to a $16,027 adjustment for wages left off a 2021 return. The taxpayer admitted the income but argued that the IRS ignored a missing $3,000 payment or credit. The Court shrugged—payment disputes aren’t its problem in a deficiency case. The IRS dropped a $1,000 penalty, and everyone was told to go do the math.
Why It Matters:
Unreported wages remain taxable even when taxpayers subsequently file amended returns.
Estimated payments and prior-year credits generally fall outside deficiency jurisdiction.
Agreed withholding and refundable credits can materially change the final liability.
Takeaway: Challenging a tax deficiency and disputing how the IRS applies payments are two different legal fights.
Tax Court upholds $24,000 income adjustment based on bank deposits analysis
Allen Shay v. Commissioner, T.C. Memo. 2026-103
The Tax Court backed a $24,000 income adjustment after the IRS conducted forensic accounting using bank records. The taxpayer said the money was already reported as rental income on an amended return, but couldn’t actually prove it. He also argued that the IRS should have interviewed him in person. The Court wasn’t buying it.
Why It Matters:
Bank deposits remain an accepted method of reconstructing unreported income.
Claims of duplicate taxation require transaction-level evidence.
An IRS examination does not necessarily require a personal interview.
Takeaway: Claiming the IRS counted income twice means little without records showing where the duplication occurred.
Court denies Schedule C deductions after taxpayer fails to substantiate expenses
MD M. Rahman & Syeda Momotaz v. Commissioner, Docket No. 8286-23
The Tax Court approved a $59,527 adjustment for unreported business receipts in 2019. Deductions for meals and repairs? Denied—no paperwork, no deduction. Supplies got a pass because both sides agreed. The IRS wanted a $2,557.80 penalty but forgot the required sign-off. The Court tossed the penalty and told everyone to finish the math.
Why It Matters:
Schedule C deductions require adequate substantiation under §162.
Courts may reject estimates when the record provides no reasonable basis for calculating expenses.
The IRS must independently establish applicable penalty requirements, even when the underlying adjustment survives.
Takeaway: The IRS can prove a taxpayer owes additional tax and still lose the penalty by failing to satisfy its own procedural requirements.
Overall Takeaway
We can debate new tax laws and IRS priorities all day, but this week’s cases boiled down to something simpler: did the numbers have backup?
Bank records beat stories. No receipts, no deductions. And the IRS tripped over its own rules and lost a penalty.
This cuts both ways. The law says what you have to prove. The records decide if you actually can.