TAX COURT OPINION

Case: Rosa M. Vasquez
Docket Number: 10419-10
Judge: Kroupa
Opinion Type: bench
Filed: 06/27/2011
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 ROSA M. VASQUEZ, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. KVC ) ) ) ) Docket No. 10419-10 ) ) ) ) O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall the pages of transmit the to petitioner and to respondent a copy of transcript of June 10, 2011, containing her oral rendered in this case. the above case before Judge Diane L. Kroupa on findings of fact and opinion In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. June 27, 2011 SERVED Jun 30 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion By Judge Diane L. Kroupa June 10, 2011 Rosa M. Vasquez v. Commissioner Docket No.: 10419-10 THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THESE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. All section references are to the Internal Revenue Code for the year 2007 and, all Rule references are to the Tax Court Rules of Practice and Procedure. Petitioner appeared pro se with the assistance of a Spanish interpreter, Raul Aguila. Ms. Kris An appeared on behalf of respondent. FINDINGS OF FACT Certain facts have been stipulated. The stipulation of facts filed by the parties, with accompanying exhibits, is incorporated by this reference. Petitioner resided in Panorama City, California at the time she filed the petition in this case. Petitioner has three sons. One son was 16 during 2007, another son was 15 and the youngest son, Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 born in 2004, was three during 2007. Petitioner lived with her three sons and her boyfriend, who is the father of her youngest son, during 2007. Petitioner cleans houses to provide for herself and her three sons. Petitioner used a tax preparer to timely file a Federal income tax return for 2007. Petitioner claimed two sons as qualifying children. She testified that she claimed her two oldest sons. Actually, however, she claimed her youngest son and the son born in 1992 as qualifying children for purposes of Schedule EIC. Schedule EIC explains that a taxpayer only has to list two qualifying children to get the maximum credit even if the taxpayer has more than two qualifying children as petitioner had in 2007. Petitioner also reported the amount of earned income she needed to report to maximize the earned income credit before the earned income credit would be phased out as the income levels increased. She reported $16,210 of Schedule C business income for 2007. She claimed no business expenses even though she testified she spent approximately $100 a month during 2007 for cleaning supplies to clean four houses in 2007. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 Petitioner received a $2,923 refund for 2007, which was largely attributable to the claimed $4,716 earned income credit under section 32 and an additional child credit under section 24. She received a refund based upon operation of the earned income credit rules rather than a refund of taxes she paid throughout the year as is typically done with wage withholdings.. Petitioner had no wage withholdings and made no estimated tax payments in 2007. Respondent audited petitioner's return and asked her to substantiate her business receipts and expenses. Petitioner provided only general descriptions of her four housecleaning clients. One was described as a mad lady, another was described as an old lady with cat, one was described as chinito and the fourth was described by petitioner to respondent as manhitas with dog. Petitioner also provided handwritten receipts from her clients to reflect that her four clients each paid her in cash only and always paid her in advance of her cleaning the homes. Petitioner refused to provide any contact information for her claimed clients, including even the address of the houses cleaned. Petitioner did not provide any cancelled checks, bank statements or any other records Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 to document any business income for 2007. Petitioner testified that she spent approximately $100 per month for cleaning supplies in 2007. She did not provide, however, any credible receipts or records representing her business expenses for 2007. Respondent determined in the deficiency notice that petitioner was not entitled to the $2,923 refund petitioner received for 2007. Respondent disallowed the business income, disallowed the earned income credit, disallowed the additional child credit, reduced the self-employment AGI adjustment and reduced the self-employment tax (collectively, the adjustments). Petitioner contests all adjustments respondent determined in the deficiency notice. OPINION We are asked to decide whether petitioner reported the correct earned income amount for 2007. This is an unusual tax question because the Commissioner does not usually seek to disallow income a taxpayer reports. The Commissioner disagrees in cases where the earned income credit is claimed because the Commissioner has learned that the earned income credit is susceptible to fraud. Aggressive tax preparers encourage taxpayers to misstate their income to claim the maximum amount of credit possible. Tax Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 preparers tout their services as a way to get "free" money from the IRS without costing the taxpayer anything as the tax preparer's fee will be a percentage of the "free" money/credit the taxpayer gets from the IRS. Respondent disagrees here with the amount of earned income petitioner reported because petitioner lacks any business records or any corroborating evidence to substantiate the maximum earned income credit petitioner claimed for 2007. Whether petitioner is entitled to the earned income credit and the additional child credit depends solely upon whether petitioner earned income and how much income petitioner earned, if any, in 2007. All adjustments in the deficiency notice flow from this proposition so we address it first. We begin with two fundamental principles of tax litigation. First, the Commissioner's determinations are generally presumed correct, and taxpayers bear the burden of proving that those determinations are erroneous. Rule 142(a). This principle is not affected by section 7491(a) because petitioner failed to comply with the substantiation requirements and failed to maintain adequate records. See sec. 7491(a) (2) (A) and (]B); sell also Higbee v. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 Commissioner, 116 T.C. 438 (2001). Second, deductions (and credits) are a matter of legislative grace, and taxpayers must show that they are entitled to any deduction (or credit) claimed. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). Substantiation means that a taxpayer shall keep such permanent records or books of account as are sufficient to establish the amount of deductions (or credits) claimed on the return. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. This means that taxpayers must identify each credit. They must show that they have met all credit requirements, and they must show that they have kept adequate books or records to substantiate all credits claimed. Id. Even more basic, taxpayers are required to keep sufficient permanent books of account and records to establish their gross income. Id. Here, petitioner has failed to provide sufficient credible documents, records or testimony to establish her gross income for 2007. She failed to provide any bank statements or other records to verify her business receipts or expenses so her business Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 income for 2007 could be established. She relies on handwritten receipts that name four clients. She refuses, however, to provide any contact information for her clients. She also refuses to provide the address of the houses she cleaned in 2007. She said that she would provide them to the Court but would not provide them to the IRS. She said she was afraid that she would lose her cleaning job if she provided the IRS the address of her client's home. The Court learned that she even refused to provide the address of two of her clients from 2007 for whom she no longer does housecleaning today. Petitioner needs to trust the IRS and needs to understand that it·is her obligation to keep accurate records. Petitioner wants to take pride in raising her sons by working hard and providing for them. The Court understands. Petitioner needs to also teach her sons to have faith in the government. The IRS is seeking to collect the right amount of tax from each taxpayer and no more. America is a great country. There is no free money however. We therefore sustain all respondent's adjustments in the deficiency notice. To reflect the foregoing, a decision will be entered for respondent. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:23 a.m., the bench opinion in the above-entitled matter was concluded.) 10 // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888