IRS Tax Court Accepts a Time-Space Percentage of 93%

"I have goose bumps! I just want to jump up and down!"

So said Jeannie Peoples, a family child care provider from Curwensville, Pennsylvania, upon hearing that she owed the IRS $4,466. The reason she was so happy is because her original auditor determined that she owed over $37,000 in taxes.

"I couldn't have asked for anything better," she said.

Her US Tax Court case is significant because the IRS recognized that a family child care provider, caring for children round the clock, is entitled to claim a Time-Space Percentage of 93%.

I represented Jeannie in her Tax Court appeal. Due to support from the National Association for Family Child Care I was able to offer my services to her without charging her a fee.

Case Details

In 2008 and 2009 Jeannie Peoples worked an average of 22 hours a day, 52 weeks a year caring for 27-36 children. She had help from her husband and other relatives.

Her original auditor allowed an 80% Time-Space Percentage but disallowed tens of thousands of dollars in business deductions. When Jeannie appealed her case the Appeals officer sided with the auditor and determined that she owed over $37,000 in taxes. Jeannie then turned to me for help in her appeal to Tax Court.

Other issues in dispute were supplies, repairs, food, advertising, depreciation, and penalties. In the Tax Court settlement we compromised on most issues but Jeannie was still allowed to deduct an average of $29,000 of supplies and over $10,000 of repairs for these two years.

We were also able to get the Tax Court to drop the $5,800 in accuracy related penalties because it was clear that Jeannie did have receipts and other records to back up her claims.

Jeannie was audited in early 2010. She lost her case before an Appeals officer in late 2011 and she filed the petition to appeal to Tax Court in 2012. It took seven months before Tax Court would hear our case.

Jeannie’s tax preparer, Jessie Reed, EA, from Clearfield, Pennsylvania, has done tax returns for 35 years and has been an Enrolled Agent since 1988. She worked hard to help Jeannie organize her records and she argued her case before the Appeals officer. Jessie put in many voluntary hours on this case that made our Tax Court appeal much easier.

I've posted a comprehensive discussion of this case, including copies of documents and letters I sent to the Tax Court. Jeannie started caring for children 24 hours a day in 2000. In late 2009 she stopped doing so to spend more time with her own family.

Lessons

After going through this long audit process, Jeannie and Jessie have some advice for family child care providers.

Jeannie said, “Save all of your records, attendance records, everything. I used a scanner to scan my receipts into my computer and this helped a lot". Both Jeannie and Jessie agreed that it makes sense to use a tax professional who understands your business. Jessie added, “Don’t be afraid to pay a professional to do your taxes. It’s worth it in the end. Don’t be afraid to ask questions of your tax preparer. You are ultimately responsible for what’s on your tax return.”

Tom’s Comments

This is the highest Time-Space Percentage I have ever seen in cases where I have represented a family child care provider. I am handling another upcoming Tax Court where the child care provider’s Time-Space Percentage is 98% (24 hour child care). The highest percentage I had won in a previous audit was 59%.

One of the lessons to take from this audit is that you should not hesitate to claim a high Time-Space Percentage if you have the records to back it up. Keeping accurate attendance records can make a difference.

In most audits involving the Time-Space Percentage the issue is whether the provider has kept accurate records of the hours they worked after the children were gone. I cannot stress how important it is for you to keep at least two months of careful records showing your business activities after the children are gone. You can use the average for these two months for the rest of the year. This is the single most important way you can reduce your taxes!

Jeannie spent a lot of money on supplies and repairs. Because she saved every receipt we were able to win most of these expenses. In some cases Jeannie counted some personal expenses with her supply deductions. It’s important to separate business from personal expenses by marking each receipt to indicate whether individual items are 100% business, 100% personal, or shared business and personal.

This case should never have reached the Tax Court. For some reason the auditor and the Appeals officer failed to look closely at her records and refused to try to reach a settlement with her and her tax preparer. They denied 100% of her repairs and over 80% of her supplies by asserting that they were not “ordinary” or “necessary” or “reasonable.” It is mind boggling that the auditors denied deductions for diaper wipes, child locks, extension cords, floor cleaner, stain remover, etc.

Tom Copeland - www.tomcopelandblog.com

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