When you decide to fight the IRS or a state tax agency, the cost of fighting must be considered. It is sometimes cheaper to lose than it is to win. It is a business decision to challenge the agency.
Two Internal Revenue Code provisions allow for the recovery of fees and costs. IRC Code sec 212(3) provides an itemized deduction for out-of-pocket fees and costs. IRC Code sec 7430 provides for a reimbursement of out-of-pocket fees/costs.
IRC Code sec 212(3) reads as follows: “In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenes paid or incurred during the taxable year –
(3) in connection with the determination, collection or refund of any tax.”
This deduction is very broad. The deduction applies to –
1. Audit, collection and refund cases
2. Federal, state or local taxes
3. Income, estate, gift, property or “any other tax”
4. Fees for tax counsel or expenses of the case, and
5. Preparation of tax returns.
Revenue Regulation 1.212-1(d) specifies the expenses must be “ordinary and necessary.” If you are in a 28 per cent federal and 9/3 per cent state tax bracket, the tax agencies are effectively paying almost 40 per cent of the fees you pay Tax Crisis Institute to defend you.
The deduction is treated as a miscellaneous itemized deduction and claimed on schedule A. The expense must exceed two per cent of AGI and the deduction is claimed in the yar the expense was incurred.
Dana M. Ronald, Tax Crisis Institute