Have a Tax Question? Ask a Tax Expert
Hi. My name is ***** ***** I will be happy to help you.
What was the dispute about?
Legal fees and penalties are usually deductible unless the fees/penalties are related to taxable income or you were fined for violating law (state or federal). Does the IRS provide any explanation why? Sometimes only part of the fees or penalties are not deductible, but the IRS will not investigate the circumstances. They will disallow everything. Than it is up to the taxpayer to prove the IRS wrong.
Ok. You were required to repay the advance fee your received. The repayment would only be deductible if the advanced money was already included in your taxable income in the previous year(s) and only deductible in the year of repayment.
If you received the advance funds in 1996 and included it in your 1996 taxable income, than you can deduct the repayment you made each year. You cannot deduct the entire repayment in one year if you repaid it over several years.
Did you take a deduction for the entire repayment in 2012?
I see. In that case the CPA is correct. You could deduct it as legal or operating expense. Your CPA needs to dispute the adjustment, the IRS notice and write a letter to explain why you are entitled to the deduction.
As part of the cost cutting measures the IRS replaced some of the IRS agents (with actual tax knowledge) with processing clerks who only follow the script. In general, people are afraid of the IRS notice and don't argue, just pay what the IRS claim they owe. Sometimes you need to dispute couple of their decision to get a real agent involved.
Any questions? Is there anything else I can help you with today?
Have you tried taxpayer advocate services?
They can be very helpful in disputes with the IRS: https://www.irs.gov/advocate
Ok. The advocates are usually not CPAs, many of them are enrolled agents. The difference is that CPA specializes in accounting (not necessarily tax accounting) and enrolled agents are the IRS licensed practitioner, specialized in taxation.
Try here: http://www.naea.org/ or check your state board of accountancy to find CPA who specializes in IRS disputes. Some of them may be both, CPAs and EAs.