Dennis J. and Carol R. Kraus - Page 17

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          maintain documents showing that the claimed expenses were                   
          incurred or paid.                                                           
               Petitioners rely on Rev. Proc. 98-25, 1998-1 C.B. 689, which           
          provides for the use of “machine sensible records” like Quicken             
          to satisfy their record keeping requirements.  Petitioners’                 
          understanding was that the revenue procedure permitted computer             
          records in lieu of other records that are required to be                    
          maintained under section 6001.  Under Rev. Proc. 98-25, section             
          11, 1998-1 C.B. at 693, however, taxpayers are not relieved from            
          the responsibility of retaining the hardcopy records from which             
          the computer records were derived; i.e., bills, invoices, etc.              
          received in the ordinary course of business.  In that regard,               
          petitioners professed to have only the Quicken printouts.                   
          Accordingly, petitioners have failed to show that they are                  
          entitled to home office deductions claimed on their Schedule C              
          for 1997 or 1998 in excess of the amounts that respondent has               
          conceded they would be entitled to as Schedule A deductions.                
          F.  Petitioners’ Liability for Section 6662 Penalties                       
               Respondent determined that petitioners were liable for                 
          penalties under section 6662(a) and (h).  Respondent has conceded           
          that petitioners are not liable for a penalty under section                 
          6662(h) but continues to maintain that petitioners are liable for           
          a penalty under section 6662(a) for negligence because they                 
          failed to maintain adequate records.                                        

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