Taxpayers have problems with undeclared income. In the case Tibin v. Commissioner of Internal Revenue Yagoub Tibin, sole owner of TM Transportation, LLC, requested a redetermination of a 2020 federal income tax deficiency determined by the IRS. The IRS alleged that Tibin had unreported income earned in his transportation business and disallowed certain business expense deductions. Key issues included:
- Unreported Income: The IRS claimed that Tibin failed to report income totaling $184,489 from contracts with entities such as American Medical Response. Because TM Transportation is a single-member LLC (a disregarded entity), its income should have been reported on Tibin’s personal return.
- Unfiled Corporate Return: Tibin’s accountant prepared, but did not file, Form 8832 along with the corporate tax return (Form 1120) for TM Transportation. The IRS disallowed the return due to the failure to elect C corporation status. As a result, TM Transportation’s income was treated as pass-through income for tax purposes.
- Deductions: Tibin claimed deductions for various expenses, including vehicle maintenance, rent, insurance, and wages. The IRS disallowed a portion of these expenses due to insufficient documentation. However, the court allowed some deductions, as Tibin provided credible evidence for certain costs, such as gasoline, insurance and employee compensation paid to his wife.
The court ruled partially in Tibin’s favor, recognizing some deductions, but upheld the IRS’s position on unreported income and certain disallowed expenses.
YAGOUB TIBIN v. COMMISSIONER OF INTERNAL TAXATION, T.C. Memo. 2024-102
Relevance to Tax Professionals:
The case Tibin v. Commissioner reinforces essential lessons for tax practitioners, emphasizing the critical role of proper documentation, timely elections and accurate reporting in tax compliance. The court upheld a significant tax deficiency due to unreported income and lack of sufficient documentation for expenses, highlighting that even where estimates are allowed under the Cohan Rule, they require credible evidence to support them. This case highlights the risks of lack of record keeping, improper classification of entities and misunderstandings of the requirements for deductions, which can lead to deficiencies, penalties and disallowed deductions.
For tax professionals, Tibin serves as a guide to advise clients on best practices in recordkeeping, substantiation and clear tax election decisions. Ensuring meticulous documentation, correct entity classification and adherence to substantiation rules helps clients reduce their tax risks and maintain compliance with complex IRS regulations.