Question

Ms. Namida Coors is an immigrant from Uzbekistan who lives in Seattle. During 2016 she operated a successful commercial cleaning business that specializes in cleaning and maintaining floors inside large retail stores. Her sales in 2016 were $1,000,000. While she was operating her cleaning business, the taxpayer was single and shared an apartment with four roommates. At some point in early 2017, the taxpayer became engaged to Mr. Yoko Jum, a man from Mongolia with no working knowledge of English, whether written or spoken. The two relocated to a new dwelling and began living together in March 2017. After the two relocated together, Mr. Jum “cleaned out various paperwork” and threw away many records, the content and importance of which were unknown to him. It later emerged that the records which Mr. Jum discarded included business bank statements, receipts, and hand written ledgers pertaining to Namida’s business. It is now April 2017 and Namida comes to you to prepare her 2016 tax return. Although the majority of her business records were destroyed by her fiancé, she tried to reconstruct her 2016 business records through third-party help (banks, vendors, etc). Through this process, Namida was able to obtain copies of various receipts for business expenses totaling $234,455, but she claims that her total expenses should be at least double as much. Namida shows you her 2011, 2012, 2013, 2014 and 2015 tax returns in which her total business expenses made up approximately 50-60% of sales. Despite the fact that her fiancé destroyed most of her business records for 2016, she wants to know if there is anything you can do to help her claim deductions in excess of $234,455 although she has lost the receipts and does not remember exactly what was purchased and when. She thinks she should be able to deduct anywhere between $500,000 and $600,000 (50-60% of sales) because it is not her fault that her fiancé threw everything away. What should you do? What would you recommend? What does the law say?

Answer 1

No, Ms Namida Coors will not be able to deduct an amount between $500,000 and $600,000 (50-60% of sales) without the supporting documents.

IRS provides certain exemptions to tax payers only if records are destroyed due to a natural disaster. Here the records were thrown away by Ms Coors’ fiancé and hence no natural disaster was involved.

My recommendation to Ms Coors is that she should try and recreate her business expenses and go back to her vendors to get copies of bills and invoices. These copies will be accepted by IRS and on the basis of them Ms Coors will be able to claim exemption. As per IRS the documentary evidence should include the amount, the date, place and nature of expense. Thus Ms Coors should get duplicate statements from her banks and from her credit card companies. She should also get duplicate invoices from her suppliers and vendors. On the basis of these documents she should recreate all her business expenses.

My recommendation is based on the law which clearly says that a deduction cannot be taken if it is not supported by a physical proof.