Nobody has been blogging taxes longerthan ImageKerry Kerstetter.  Before the TaxProf started his blog in 2004, his “Tax Guru” blog was about all there was for some time for company after the 2001 beginning of the Tax Update.  Much of what he posts isn’t to my taste, and in recent years he mostly has reposted political cartoons, but he seems competent enough.  That’s why I find Tuesday’s Tax Court case shocking (assuming that the Kerry M. Kerstetter in the case is the same Arkansas tax practitioner who does Tax Guru).

It’s not shocking that a tax practitioner would lose a case.  The tax law is hard, and there are plenty of areas for dispute.  It’s the way this case was lost that is a dazer.  From the Tax Court opinion (my emphasis):

 Petitioners contend that interest paid on credit card debt reflects borrowing to pay business expenses. Their generalized assertions cannot be verified or traced in the documentary evidence.

His joint return claimed a big net operating loss carryforward to offset taxes for 2001 and later.  The Tax Court disallowed the NOL carryforward:

Petitioners also attempt to use self-serving and conclusory assertions rather than evidence with respect to the net operating loss carryover, demanding that respondent’s representatives identify “specific documents” needed to substantiate their carryovers. Petitioners have the burden of proving the amounts of the losses and that they have not been absorbed in other years. See, e.g., Keith v. Commissioner, 115 T.C. 605, 621 (2000); Sandoval v. Commissioner, T.C. Memo. [*8] 2001-310, aff’d without published opinion, 67 Fed. Appx. 252 (5th Cir. 2003). They have not shown either, and none of the claimed carryovers may be allowed.

So the issue was documentation.  They failed to provide support for deductions claimed on the return, at least to the judge’s satisfaction – a common mistake, but one that practitioners certainly know about.

This is the most surprising item, to me:

Petitioners’ 2001 tax return was due, with extensions, October 15, 2002, but was not filed until May 31, 2003, the same date on which their 2002 return was filed. Their 2003 return was due, with extensions, October 15, 2004, but was not filed until July 9, 2005, two days before their 2004 return was filed. Petitioners did not have reasonable cause for late filing of their returns.

My return is often the last one I get to, and I’ve done my share of October filings.  The cobbler’s children always go barefoot, as they say.  But missing the extension deadline for multiple years?

It’s certainly possible that there is more to the story than the Tax Court opinion reveals, and maybe there will be an appeal.  As things stand, the taxpayers are on the hook for back taxes and the 20% “accuracy-related penalty.”  Regardless of the ultimate outcome, we can draw some lessons from this case:

- File your return on time.  There is little or no additional risk of being audited for filing an extended return, but the chances of getting examined go way up when you blow the extension deadlines.

- Keep your old records.  The taxpayers failed to produce records of their loss carryforwards to the court’s satisfaction.  Keep the tax records for loss years as long as the carryforward years to which you applied the losses remain open.

Image: Tax books/Shutterstock

Cite: Kerstetter, T.C. Memo 2012-239

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