Taxpayer Use of Estimates for Deductions

Published Categorized as Federal Income Tax, Recordkeeping, Tax Deductions, Tax Procedure
Taxpayer Use Of Estimates For Deductions, Houston Tax Attorney

Can you use publicly available sources of statistical information when you have no records to support the amount of your expenses?  The court addressed this in Murray v. Commissioner, T.C. Summary Opinion 2012-66, which involved the IRS’s use of third-party statics.

Facts & Procedural History

Mr. Murray worked as a truck driver for National Freight, Inc. (National Freight) in 2007, 2008, and 2009.  He also operated a trucking business during the 2007 tax year.

He received a Form W-2, Wage and tax Statement, from National Freight and he reported the income and expenses for his trucking business in 2007 on a Schedule C.

The IRS audited and examined Mr. Murray’s federal income tax returns and disallowed the following Schedule C trucking expenses for 2007: advertising, car and truck, depreciation, insurance (other than health), legal and professional services, office, repairs and maintenance, supplies, taxes and licenses, and travel.

The IRS allowed $7,860 of expenses for Mr. Murray’s trucking business for 2007 on the basis of the average annual trucker expenses reported in Bizstats. Bizstats is a free online source for small business statistics.

The IRS also disallowed the following Schedule A unreimbursed business expenses for 2007, 2008, and 2009: professional subscriptions; uniforms and protective clothing; job search costs; work shoes and support; work gear and equipment; and tolls, parking, and local travel.

Mr. Murray filed a petition in tax court to contest the IRS’s determination.

Taxpayer Use of Estimates

The law does not necessarily allow taxpayers to use estimates to determine the amount of deductions.  This is particularly true for cases where the absence of records is due to the taxpayer’s fault or negligence.  But estimates are sometimes needed in order to file a tax return.  In balancing the competing evil of not filing a tax return or filing an inaccurate tax return, the law and courts put a preference on filing an inaccurate tax return.

IRS Use of Statistics

Unlike taxpayers, the IRS and the courts frequently rely on statistics to resolve tax disputes.  The Murray case is a prime example.

The court allowed the expenses up to the amount the IRS estimated using Bizstats.  It did not go beyond this estimate for other expenses, noting:

We are unable to reconcile petitioners’ records with any deduction claimed on their tax returns. Moreover, we are unable to differentiate personal from business receipts in many circumstances, and several receipts are clearly personal…. Furthermore, petitioners testified that many of the expenses were estimates, several of which appear to be duplicated or unreasonable. Finally, petitioners are unable to provide any documentation for certain expenses, nor are they able to explain many of the deductions.

The U.S. Tax Court did not have to allow the use of estimates, as the tax court is de novo–meaning, it is not bound by the IRS auditor’s prior determinations.

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