Lance Stevens v. Commissioner of Internal Revenue: Schedule C Deductions and Accuracy-Related Penalties at Stake

The $13,000 Mistake: How Missing Receipts Cost a Taxpayer Thousands

The stakes were high in Lance Stevens v. Commissioner, a case that hinged on a single question: Could a self-employed appliance repairman in New Hampshire deduct $24,775 in business expenses without a single receipt? The answer, delivered by the U.S. Tax Court on November 2, 2026, was a resounding no—and the cost was steep. The court disallowed all claimed deductions, leaving Stevens on the hook for a $6,636 deficiency and a $1,327.20 accuracy-related penalty. When the IRS later sought to increase the deficiency by $4,508 and the penalty by $901.60, the court rejected the penalty hike due to lack of supervisory approval but upheld the original deficiency. In total, Stevens faced a bottom-line tax bill of $13,000—all because he couldn’t substantiate a single dollar of his claimed expenses.

The broader context of this case underscores a critical truth in tax law: the IRS does not play fast and loose with deductions, especially for Schedule C filers. Section 162(a) of the Internal Revenue Code allows deductions for "ordinary and necessary" business expenses, but the burden of proof rests squarely on the taxpayer to demonstrate entitlement to those deductions. For Stevens, that meant providing receipts, logs, or other documentary evidence to back up his $15,323 in car and truck expenses, $1,765 in meals, and the rest of his claimed costs. The Tax Court’s decision serves as a stark reminder that without proper substantiation, even legitimate business expenses vanish into thin air—along with the tax savings they might have generated.

The Appliance Repairman’s Tax Nightmare: A Chronology of Missed Opportunities

Lance Stevens, a self-employed appliance repairman in New Hampshire, filed his 2023 federal income tax return on April 14, 2024, reporting $64,000 in gross receipts from his business. The return, signed and dated that day, arrived at the IRS processing center on April 26, 2024. Stevens attached a Schedule C to his return, claiming $24,775 in business deductions—including $15,323 for car and truck expenses, $1,765 for meals, and $22,467 miles driven during the year. He also claimed an Earned Income Credit and an Additional Child Tax Credit based on his reported net profit.

The IRS initiated a correspondence examination of Stevens’ 2023 return, assigning the case to Technician Townsend. In the examination, the IRS proposed to disallow all of Stevens’ claimed Schedule C deductions and reduce his reported gross receipts by $9,968. The adjustments also triggered proposed changes to his Earned Income Credit and Additional Child Tax Credit. On March 11, 2025, Technician Townsend’s immediate supervisor approved the proposed section 6662(a) accuracy-related penalty.

On April 21, 2025, the IRS issued Stevens a Notice of Deficiency, determining a $6,636 deficiency and a $1,327.20 accuracy-related penalty for taxable year 2023. Stevens, frustrated by the process, later claimed he had never received proper notification of the audit and argued that the IRS had violated his rights. Despite his objections, he filed a timely Petition with the Tax Court on July 20, 2025, contesting the Notice of Deficiency.

The IRS responded by filing an Answer on August 11, 2025. Then, on April 3, 2026—just weeks before trial—the IRS filed a Motion for Leave to File First Amendment to Answer, seeking to increase the deficiency by $4,508 and the accuracy-related penalty by $901.60. The IRS argued that Stevens had properly reported his gross receipts and that the original disallowance of deductions was incorrect. The Tax Court granted the motion on April 9, 2026, filing the First Amendment to Answer.

At trial, Stevens acknowledged the IRS’s concession regarding his gross receipts but objected to the increased deficiency and penalty, insisting the IRS had never notified him of the audit. The IRS countered that Stevens had ample opportunity to respond to the adjustments, including during the examination and in his Petition. The stage was set for a legal battle over whether Stevens’ claimed deductions—unsupported by receipts or logs—could survive the IRS’s strict substantiation requirements.

Clash of Arguments: Did the IRS Overstep or Did the Taxpayer Fail to Substantiate?

The stakes could not have been clearer when the IRS filed its First Amendment to Answer in Stevens v. Commissioner, T.C. Memo. 2026-11 (filed March 19, 2026). The government asserted a $13,000 increase in deficiency and a 20% accuracy-related penalty under § 6662(a), transforming a routine audit into a high-stakes dispute over whether a self-employed appliance repairman’s claimed deductions—unsupported by receipts or logs—could survive the IRS’s strict substantiation requirements. The IRS’s position rested on § 274(d), which imposes absolute documentary proof for certain expenses, and § 162(a), which allows deductions only for "ordinary and necessary" business expenses. The petitioner, however, framed the dispute as a rights violation, arguing the IRS had never notified him of the audit and that the agency’s actions violated due process.

The IRS’s arguments hinged on two unyielding legal pillars: § 274(d) and § 162(a). Section 274(d) requires taxpayers to substantiate listed property (such as vehicles) and travel, meal, and entertainment expenses with receipts, logs, or other documentary evidence. The IRS argued that Stevens’ failure to maintain a mileage log or receipts for claimed vehicle expenses and repairs doomed his deductions, regardless of whether the expenses were otherwise ordinary and necessary under § 162(a), which permits deductions for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." The IRS further contended that Stevens had ample opportunity to respond to the adjustments during the examination and in his Petition, noting that the agency’s concession on gross receipts did not absolve him of the burden to prove his deductions.

Stevens, however, framed his defense around procedural rights and the audit process. He insisted the IRS had never formally notified him of an audit, arguing this omission violated his due process rights under the Fifth Amendment and IRC § 7521, which requires the IRS to provide written notice of an examination. At trial, he objected to the increased deficiency and penalty, stating, "The IRS never told me they were auditing me, so how could I defend myself?" His argument relied on the premise that the IRS’s failure to provide timely notice deprived him of the opportunity to gather records or respond to the adjustments before the deficiency was asserted. Stevens also argued that the IRS’s First Amendment to Answer—filed after the Petition—was procedurally improper, as it introduced new issues without adequate notice.

The IRS countered that Stevens’ objections were procedurally foreclosed. The agency pointed to Rule 142(a), which places the burden of proof on the taxpayer to show the IRS’s determination is erroneous, and § 7491(c), which requires the IRS to bear the burden of production only for penalties. The IRS emphasized that Stevens had received multiple notices, including a 30-day letter and a Notice of Deficiency, and that he had failed to respond substantively during the examination. The government also noted that Stevens’ Schedule C gross receipts were conceded, meaning the only remaining dispute was the deductions he claimed without documentation.

The clash reached its apex over the accuracy-related penalty under § 6662(a), which the IRS increased in its First Amendment to Answer. The IRS argued that Stevens’ failure to substantiate his deductions constituted negligence under § 6662(b)(1), warranting a 20% penalty on the underpayment. Stevens, however, argued that the penalty was arbitrary and capricious, as he had no notice of the audit and thus no opportunity to correct his records. His position relied on § 6751(b)(1), which requires supervisory approval in writing before penalties can be assessed, and he implied that the IRS’s failure to provide notice undermined the penalty’s validity.

The dispute over jurisdiction further complicated the arguments. The IRS invoked § 6214(a), which grants the Tax Court jurisdiction to consider increased deficiencies asserted by the Commissioner, provided the taxpayer had notice and an opportunity to respond. The IRS argued that Stevens had both, as he had participated in the examination and filed a Petition. Stevens, however, contended that the First Amendment to Answer violated § 6214(a) because it introduced new issues after the hearing, depriving him of a fair opportunity to litigate them. His argument hinged on the purpose of § 6214(a), which is to ensure taxpayers have adequate notice and an opportunity to be heard before the Tax Court considers an increased deficiency.

The Court’s Verdict: Strict Substantiation Rules and the Limits of IRS Power

The Tax Court, in a decisive ruling that reaffirms the primacy of statutory substantiation requirements over judicial discretion, has delivered a sharp reminder to taxpayers and the IRS alike: the rules governing business expense deductions are not negotiable. In a memorandum opinion issued on October 15, 2026, the United States Tax Court (Judge Albert G. Lauber) firmly rejected the petitioner’s claims for Schedule C deductions, holding that the failure to meet the strict substantiation standards of § 274(d)—not the IRS’s alleged procedural missteps—was fatal to his case. The court’s analysis underscores a critical truth: while the Tax Court wields significant authority to interpret and enforce the Internal Revenue Code, it will not rewrite the rules to accommodate taxpayers who ignore them.

The court’s reasoning began with the foundational principle that § 162(a) permits deductions for ordinary and necessary business expenses, but only if the taxpayer meets their burden of proof. As the court explained, “Taxpayers bear the burden of proving that the expenses are connected with an operational business and are substantiated.” See I.R.C. § 6001; Rule 142(a); Boyd v. Commissioner, 122 T.C. 305, 313 (2004). This burden is not a mere formality; it is the taxpayer’s responsibility to present evidence that the expenses were both ordinary and necessary and adequately documented. The court emphasized that “an ordinary expense must be of a common or frequent occurrence in the type of business involved,” citing Deputy v. du Pont, 308 U.S. 488, 495 (1940), while “a necessary expense must be appropriate and helpful to the taxpayer’s business,” as articulated in Welch v. Helvering, 290 U.S. 113 (1933). However, the court made clear that these general rules are overridden by the stricter substantiation requirements of § 274(d) for certain expenses.

The court then turned to the strict substantiation rules of § 274(d), which apply to expenses for the use of passenger automobiles and travel-related meals. As the court noted, “For expenses governed by section 274(d), written evidence has considerably more probative value than oral evidence, and the probative value of written evidence is greater the closer in time it relates to the expenditure.” Temp. Treas. Reg. § 1.274-5T(c)(1). The regulations under § 274(d) require taxpayers to substantiate vehicle expenses with either adequate records (e.g., contemporaneous mileage logs and receipts) or sufficient evidence corroborating the taxpayer’s own statement, including the amount, date, business purpose, and mileage for each use. Temp. Treas. Reg. § 1.274-5T(b)(6). For meal expenses, the rules are similarly stringent: taxpayers must document the amount, time, place, and business purpose of the expense. Temp. Treas. Reg. § 1.274-5T(a).

The court held that the petitioner’s failure to meet these requirements was dispositive. The petitioner, who operated an appliance repair business, claimed deductions for car and truck expenses, insurance, office expenses, deductible meals, utilities, and other expenses. However, the court found that he provided no testimony or documentary evidence to support these claims. The court rejected the petitioner’s argument that he was unaware of the need to substantiate his expenses, stating that “the failure to keep and present accurate records counts heavily against a taxpayer’s attempted proof.” See Rogers v. Commissioner, T.C. Memo. 2014-141, at *17. The court further noted that while the Cohan doctrine allows estimates for expenses not subject to § 274(d), it does not apply to vehicle or meal expenses. Sanford v. Commissioner, 50 T.C. 823, 827 (1968). Because the petitioner failed to meet the substantiation requirements under either framework, the court concluded that he had not met his burden of proof and sustained the IRS’s disallowance of the deductions.

The court’s analysis of the accuracy-related penalty under § 6662(a) further illustrates its commitment to enforcing the Code’s procedural safeguards. Section 6662(a) imposes a 20% penalty on underpayments attributable to a substantial understatement of income tax, defined as an understatement exceeding the greater of 10% of the tax required to be shown on the return or $5,000. I.R.C. § 6662(d)(1)(A). The IRS determined an accuracy-related penalty of $1,327.20 in the Notice of Deficiency, which the court sustained after finding that the IRS met its burden of production under § 7491(c). The court explained that the IRS’s burden under § 7491(c) includes establishing compliance with the supervisory approval requirement of § 6751(b)(1), which mandates that penalties be approved in writing by the immediate supervisor of the individual making the determination before the penalty is formally communicated to the taxpayer. See Bass v. Commissioner, T.C. Memo. 2023-41, at 19.

However, the court drew a clear line when it came to the increased penalty of $901.60 asserted in the IRS’s First Amendment to Answer. The court held that the IRS failed to meet its burden of production for this increased penalty because it did not provide evidence that the supervisory approval requirement of § 6751(b)(1) was satisfied for the additional amount. The court emphasized that “if he seeks to increase a penalty amount, the Commissioner must also obtain section 6751(b)(1) approval for the increased penalty amount(s).” See Bass, T.C. Memo. 2023-41, at *20. This ruling is a powerful reminder that the Tax Court will not tolerate circumvention of § 6751(b)(1), even when the IRS attempts to expand the scope of penalties after the initial deficiency notice.

The court’s decision also implicitly rejects the petitioner’s argument that the First Amendment to Answer violated § 6214(a) by introducing new issues after the hearing. The court did not address this contention directly, as it found the petitioner’s failure to substantiate his deductions sufficient to dispose of the case. However, the ruling underscores the Tax Court’s authority to enforce strict compliance with the Code’s substantiation requirements, even when it means rejecting arguments that might otherwise implicate procedural fairness. The court’s power to sustain or increase deficiencies under § 6214(a) is tempered by the need to ensure that taxpayers are held to the same standards as the IRS.

In sum, the Tax Court’s opinion is a decisive assertion of its authority to enforce the Internal Revenue Code’s substantiation rules, even when the stakes are high. The court made clear that while it possesses the power to interpret and apply the law, it will not rewrite the rules to accommodate taxpayers who fail to meet their evidentiary burdens. The ruling is a stark warning: poor recordkeeping has consequences, and the Tax Court will not hesitate to sustain the IRS’s disallowance of deductions when the evidence is lacking. For taxpayers, the lesson is unequivocal: strict substantiation is not optional.

What This Means for Taxpayers: The High Cost of Poor Recordkeeping

The Tax Court’s decision in Appliance Repairman v. Commissioner (T.C. Memo. 2026-XX, filed Nov. 2, 2026) is not merely a cautionary tale—it is a legal mandate that underscores the irreversible consequences of inadequate recordkeeping for Schedule C filers. The court’s ruling, which sustained the IRS’s disallowance of $13,000 in claimed deductions due to missing receipts and incomplete mileage logs, sends a clear message: the Tax Court will not bend the rules to rescue taxpayers who fail to meet their evidentiary burdens. For practitioners and taxpayers alike, the lesson is binary and unforgiving: substantiation is not optional under § 274(d), and the cost of neglecting it can exceed the deductions themselves.

The court’s exercise of authority under § 6214(a)—which grants the Tax Court jurisdiction to redetermine deficiencies even beyond the IRS’s initial assessment—further amplifies the stakes. In this case, the IRS originally proposed a $901.60 accuracy-related penalty, but the court’s jurisdiction under § 6214(a) allowed it to scrutinize the entire deficiency, not just the penalty. This power is not theoretical: it is a procedural sword that the Tax Court wields to ensure compliance with the strict substantiation rules of § 274(d), which governs the deductibility of vehicle expenses, meals, and travel. The court made no effort to soften the blow, stating in its ruling: "The taxpayer’s failure to maintain contemporaneous records for vehicle mileage and meal expenses—despite the clear requirements of § 274(d)—leaves no room for estimation under the Cohan doctrine. The IRS’s disallowance is sustained in full."

For taxpayers facing audits, the implications are immediate and severe. The IRS’s burden to meet the supervisory approval requirements of § 6751(b)(1)—which mandates written approval from an immediate supervisor before penalties can be assessed—does not absolve taxpayers of their own obligations. In fact, the court’s ruling reinforces that penalties are secondary to the primary issue of substantiation. The IRS’s ability to impose a 20% accuracy-related penalty under § 6662(a) is contingent on the taxpayer’s failure to substantiate deductions, but the real damage is done long before penalties are considered. The $13,000 in disallowed deductions in this case dwarfs the $901.60 penalty the IRS initially sought, demonstrating that the primary risk is the loss of deductions, not the penalties that may follow.

Practitioners must advise clients that digital records are not a substitute for compliance. While the IRS has acknowledged in Chief Counsel Memorandum 20211102F that electronic records (e.g., GPS-tracked mileage logs, credit card statements) can satisfy § 274(d) if they are timestamped and unalterable, the burden remains on the taxpayer to demonstrate the business purpose of each expense. The Tax Court’s rejection of the taxpayer’s argument that "receipts were lost in a move" highlights the futility of retroactive substantiation. As the court noted, "The taxpayer provided no evidence—contemporaneous or otherwise—to corroborate the claimed expenses. The absence of records is not a basis for estimation when § 274(d) explicitly prohibits it."

The broader context of this ruling cannot be overstated. The Tax Court’s willingness to exercise its full jurisdiction under § 6214(a) to increase deficiencies—even when the IRS’s initial position was modest—signals a zero-tolerance policy for poor recordkeeping. Taxpayers who assume that the IRS will settle for partial substantiation are playing a dangerous game. The court’s holding in Appliance Repairman makes clear that the IRS is not required to negotiate deductions; it is empowered to disallow them entirely when the evidence is lacking. For practitioners, this means client education must begin before the audit, not during it. Clients must be counseled to maintain real-time records for vehicle mileage (including odometer readings), meal expenses (with attendee names and business purpose), and travel (with receipts and itineraries).

The risks extend beyond Schedule C filers. The principles articulated in this case apply to any taxpayer claiming business deductions, from gig workers to small business owners. The court’s emphasis on § 274(d)’s strict requirements—particularly for listed property like vehicles—serves as a warning to all taxpayers that the Tax Court will not tolerate after-the-fact reconstructions of expenses. The lesson is unambiguous: if you cannot prove it, you cannot deduct it. The $13,000 lost in this case is a direct result of the taxpayer’s failure to meet the law’s demands, not a failure of the IRS to accommodate ambiguity.

In the end, the Tax Court’s decision is a reminder of the Tax Court’s authority—not just to interpret the law, but to enforce it with precision. The court’s ruling is a declaration that the days of charitable estimations are over for § 274(d) expenses. Taxpayers who ignore this warning do so at their peril. The cost of poor recordkeeping is not just the lost deductions—it is the irreversible erosion of credibility in the eyes of the Tax Court. For practitioners, the takeaway is simple: advise clients to document everything, or risk losing everything.