We have written numerous articles over the years about substantiating deductions, whether they be charitable donations or business expenses or any other type of deduction.[1] As noted by the Supreme Court, deductions “are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to any deduction claimed.”[2] A recent Tax Court (the “Court”) case serves as a good reminder of this premise.[3] The taxpayer, Ishveen Chopra (“Chopra”), deducted numerous business expenses and was unable to substantiate them, but not for lack of trying. Chopra submitted numerous false statements and documents to the Court and ultimately found herself liable for the civil fraud penalty as well.
Facts
Chopra was a health care consultant and had W2 wages of $188,015 for the tax year 2019. In addition, she reported and deducted $89,828 in business expenses from her individual consulting activities, reporting such deductions on Schedule C to her Form 1040. She also reported medical expenses of $68,977 on her Schedule A as an itemized deduction. Her return was audited and the business and medical expenses became the primary issues.
In response to a request from the revenue agent regarding the business expenses, Chopra provided numerous credit card statements, hotel bills, and invoices from legal services. All of the documents provided were suspicious. For instance, the credit card statements provided were not for consecutive periods and contained numerous inconsistencies. The hotel bills had names spelled incorrectly and very odd checkout times such as 11:10PM. Several receipts showed billings to the nonexistent Discover account. She also provided invoices for legal services from the Chen Law Firm, but when contacted by the IRS, the Chen Law Firm responded that it had no such billing records and could not find anything that matched the invoices. That said, the Chen Law Firm did provide information about legal invoices paid in 2017 and 2018.
In response to a request from the revenue agent regarding the medical expenses, Chopra produced an invoice from United Healthcare which purported to show that they had denied her claim for coverage of expenses for acute appendicitis in 2019 and alleged she had been treated at John Hopkins. The IRS contacted John Hopkins for its billing records for Chopra which turned out to be nonexistent. In its opinion, the Court noted the United Healthcare document was clearly fraudulent as had “an impossible 9-digit phone number for United Healthcare, 800-624-822.”
According to the IRS, Chopra was largely uncooperative and failed to respond to numerous requests for information or attempted communications. She repeatedly failed to provide tax returns for an alleged partnership of which she was a partner. Ultimately, the IRS denied her business deductions and medical expenses and issued her a Notice of Deficiency for such back taxes as well as the civil fraud penalty of 75% of the underpayment under §6663 due to all of the issues with the evidence she had provided.
Analysis
The Court started its opinion noting that the Commissioner’s determinations enjoy the presumption of being correct, thus putting the burden on the taxpayer to prove they are incorrect. In addition, the taxpayer bears the burden of proving the applicability of any deduction.[4] The Court then began discussing the various items provided by Chopra to substantiate her business expenses, or in many cases, the items not provided. As noted in the facts, everything she provided was riddled with issues and it became apparent that most of what was provided had been fabricated. Part of her alleged business expenses were related to a partnership of which she was a partner, yet she failed to provide any information related to the partnership. Eventually, the Court ordered that she produce the partnership’s tax returns to which she responded they were irrelevant. The Court noted a negative inference would be inferred if she did not provide them, which she never did. To this end, the Court noted that partners cannot deduct partnership expenses on their individual returns unless the partnership agreement specifically requires the partner to pay them out of pocket.[5] When discussing the medical expenses, the Court stated that the “document was digitally altered and [was] fraudulent” thus denying those expenses. In the end, the Court denied the deductions due to lack of substantiation, stating: “[P]etitioner wholly failed to substantiate the deductions claimed. The credit card statements she produced were intentionally incomplete and appear to have been altered or forged. The same is true for her purported invoices. And we did not find her testimony in any respect credible.”
Moving on to the civil fraud penalty, the Court first addressed supervisory approval under §6751, noting that the Civil Fraud Approval Form had been properly prepared and signed, and thus the penalty was properly and timely approved. With that addressed, the Court moved on to the penalty itself, noting that the IRS “must prove by clear and convincing evidence that there was an underpayment of tax and that at least some portion of it was due to fraud.”[6] The Court concluded that Chopra had demonstrated multiple badges of fraud by giving false documents, having her evidence riddled with inconsistencies, lack of cooperation with taxing authorities, and understating her income, noting that “failing to supply adequate records and falsifying documents is evidence of intent to conceal information from the IRS.”[7] Based on the record as a whole, the Court concluded that Chopra’s understatement of income was due to fraud, noting that understating income can be done by overstating deductions.[8]
Conclusion
As noted at the onset, we have repeatedly harped on the need to substantiate deductions, and the application of the INDOPCO case regarding deductions being a matter of legislative grace. It is imperative taxpayers keep adequate records for all business expenses, charitable deductions, and the like, and also comply with any heightened substantiation requirements that may be applicable to certain deductions, including a qualified appraisal for charitable deductions in excess of $5,000.[9] That said, if you are a taxpayer who finds themselves unable to properly substantiate deductions, please do not falsify records and submit fraudulent documents to the IRS. Here, the taxpayer was likely dead in the water with the deductions likely being false anyway, but she doubled down with providing falsified documents, thus ensuring the application of the civil fraud penalty. Keeping adequate records takes time and necessitates organization, but it is required and can pay off in the event the IRS ever comes calling.
[1] See https://www.esapllc.com/izen-jet-2022/ for one such article.
[2]INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992).
[3] Chopra v. Comm’r, TC Memo 2025-2.
[4] INDOPCO, 503 U.S. 79, 84 (1992).
[5] Cropland Chem. Corp. v. Comm’r, 75 T.C. 288, 295 (1980), aff’d, 665 F.2d 1050 (7th Cir. 1981).
[6] § 7454(a), See Also Richardson v. Comm’r, T.C. Memo. 2006-69, aff’d, 509 F.3d 736 (6th Cir. 2007).
[7] Meier v. Comm’r, 91 T.C. 273, 302 (1988).
[8] Gould v. Comm’r, 139 T.C. 418, (2012), aff’d, 552 F. App’x 250 (4th Cir. 2014).
[9] §170(f)(11)(C).
