None of us wants to end up in Tax Court. But if you go, it might be a good idea to a) meet your filing deadlines and b) actually show up. TC Memo 2016-93 just came out, showing us an example of a taxpayer who did neither.
This taxpayer failed "to cooperate in the preparation of her case." She did not submit any pre-trial documents, including, and especially, any substantiation for the deductions taken on the Schedule C for her life coaching business. So, the court ordered her to submit by August 22, 2014. She finally did, but less than two weeks before the September trail date. Then, she didn't show up at her trial in late September 2014! She also didn't show up on the rescheduled date two days later in early October! It was rescheduled again for the next day; she finally showed up, two hours late.
The court ordered the parties to provide briefs by mid-December 2014. The IRS beat the deadline by 6 days; the taxpayer missed the deadline. The court gave her a second chance and gave her a January 2015 deadline. She failed to meet that. So, the court precluded her from filing a brief. Furthermore, to sanction the taxpayer for her violation of the Court's order to provide documents to substantiate her deductions by August 22, 2014, the court disallowed her from introducing the documents into evidence. Eeesh!
What did this mean for the taxpayer? It meant that all she had left to defend herself was her oral testimony. Not good, but it's possible all would not be lost. Using the precedent set by Cohan v. Commissioner in 1930, the court is allowed to estimate amounts of deductions when there is evidence that the taxpayer incurred the expenses. But, of course, there has to be some basis for the estimate. Unfortunately for our dear taxpayer in this case, her testimony was too vague for anything but her storage and moving expenses to stick. In addition, the Cohan rule is not allowed for §274(d) expenses - those travel, mileage, meals, etc. expenses that require additional substantiation. Because she was barred from providing any additional substaation, these deductions were disallowed. (Given her track record, it seems unlikely that she would have provided that additional substantiation anyway, so the extra requirements of §274(d) are probably moot in this particular case).
The court kept the Substantial Understatement Penalty in place; it was merciful and did hold back on Neglicence Penalty. The dollar amount of the imposed penalty is not outlined in the court's memo, but we can assume it is are not small. Surely, the Failure to Pay penalty as well as late payment interest also added to her bill.
So, what did we learn? Pretty basic stuff: keep good records, submit your materials, show up on time, provide credible testimony. Blowing off Tax Court is not a good idea. Perhaps she could have used some help from a life coach?