Tax Court Decision Offers Insights into Strong Recordkeeping Policies
Posted by Kevin Smeader on September 22, 2025
Running a business isn’t just about delivering great products or services. Behind the scenes, strong recordkeeping is one of the most important factors for financial health, compliance, and tax savings. In fact, poor documentation can cost you thousands in lost deductions and penalties. A recent U.S. Tax Court case shows why this is important.
Why Recordkeeping Is Critical
The IRS requires every business, big or small, to maintain accurate records of income, expenses, assets, and liabilities. Without these records, you risk:
- Losing tax deductions and credits
- Struggling to track cash flow and profitability
- Preparing inaccurate financial statements
- Making poor financing decisions
- Failing IRS audits
In short, good records protect your business and your bottom line.
What Happened in Tax Court
In Tax Court Memo 2025-12, a union power-line worker who also owned several businesses claimed large deductions for partnership losses, tools, clothing, and travel. The problem? His records were incomplete.
- Missing invoices and receipts made it impossible to verify expenses.
- No mileage logs for vehicle use meant the court couldn’t separate business from personal travel.
- Partnership losses couldn’t be substantiated because he didn’t document his capital contributions.
The result: The court disallowed many deductions and imposed an accuracy-related penalty, typically 20% of the underpayment. This case isn’t rare; businesses lose tax breaks every year due to poor recordkeeping.
Best Practices for Bulletproof Records
To avoid costly mistakes, implement these strategies.
1. Separate business and personal finances
Use dedicated business bank accounts and credit cards. Mixing expenses invites IRS scrutiny.
2. Document expenses immediately
Keep mileage logs and note the purpose of each trip. Don’t wait months to record details.
3. Use accounting software
Tools like QuickBooks® help categorize expenses, generate reports, and sync with bank accounts.
4. Keep source documents
Save invoices, receipts, bank statements, and canceled checks. Scan or photograph them to prevent loss.
5. Know retention rules
Most records should be kept for at least three years, but payroll and property records may need longer. If income is underreported by 25% or more, the IRS can audit up to six years.
6. Establish internal controls
For businesses, best practice is to require dual signatures for large expenses and separate duties for authorization and recordkeeping.
The Bottom Line
Reliable records aren’t optional, they’re essential. Without them, even legitimate deductions can disappear.
- Set up a recordkeeping system tailored to your business
- Identify deductible expenses and how to document them
- Review your books before the IRS does
- Handle IRS challenges with confidence
Contact us today to protect your business and safeguard valuable tax breaks.
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As a principal in both our tax and outsourced accounting services departments, Kevin is responsible for serving commercial businesses and their owners with a wide variety of services. These services include tax planning and compliance, outsourced accounting/fractional CFO services, strategic planning, financial analysis, and business process outsourcing. Kevin has experience in several areas of taxation including personal income tax, taxation of commercial business entities (Partnerships, S Corporations, C Corporations), and State and Local Tax Issues. He has experience in many different industries, but his focus is on closely held commercial businesses, contractors, rental real estate, real estate development, and professional service firms. He is also actively involved in staff development and enjoys teaching newer staff.