A client walks in with a CP2000 disallowing $24,000 of itemized deductions for lack of substantiation. The brokerage receipts are missing, the divorce decree allocates mortgage interest in a way the bank statements don't reflect, and the prior-year return shows a carryover the client can't trace. Document quality decides this case.
Five subtypes recur on exam fact patterns.
- Cancelled checks (or electronic equivalent). Front and back proves both payment and payee identity. Strongest single document for cash-equivalent disbursements
- Bank statements. Prove the payment cleared and the date. Often do not show payee identity or business purpose. Pair with an invoice or receipt
- Credit card statements. Same posture as bank statements. The card statement shows the merchant and amount but not the business purpose
- Receipts. Required under §274(d) for lodging in all amounts, and for any travel, meal, gift, or listed-property expenditure of $75 or more. Below $75, a contemporaneous log entry suffices
- Brokerage records. Form 1099-B, trade confirmations, monthly statements documenting basis, lot identification, wash-sale adjustments, and holding period.
Common mistakes
- Relying on Cohan estimation for §274 items. Cohan permits reasonable estimation only when records were lost without taxpayer fault, and §274(d) explicitly overrides Cohan for travel, meals, gifts, and listed property. Trap answer: "Taxpayer reconstructs $3,200 of meals from memory."
- Treating bank or credit card statements as proof of business purpose. They prove amount, date, and payee, never purpose. Pair with invoice or contemporaneous note. Trap answer: "Bank statement alone substantiates a $2,000 supplies deduction."
- Citing a post-2008 divorce decree to claim dependency. Form 8332 signed by the custodial parent is required for the non-custodial parent to claim CTC $2,200. Decree language alone fails. Trap answer: "2015 decree assigning the exemption to the father satisfies §152(e)."
Bottom line
- Five doc categories: Financial, Legal, Prior/subsequent returns, Contemporaneous/substantive, Entity-formation
- Burden of substantiation rests on the taxpayer. IRC §7491 shifts it only when records are credible and the taxpayer cooperated
- Cohan rule permits estimation when records are lost without taxpayer fault, but never for §274 items (travel, meals, gifts, listed property)
- Retention: 3 years general (§6501), 6 years for 25%+ omission, indefinite for fraud or no return, 3 years after sale for basis on property still owned
Exam shortcut
"Bank statement alone" answers usually lose. If the deduction is supported only by bank or credit card statements with no invoice or contemporaneous note, expect disallowance for §274 items and weakness elsewhere. Divorce plus non-custodial parent dependency claim = Form 8332. Decree language is a distractor in any fact pattern dated after 2008. Challenged partnership special allocation = check book capital accounts, liquidation provision, and QIO/DRO.
The full lesson (about 1,990 words, 13 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 4
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