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emc011075, Tax adviser
Category: Tax
Satisfied Customers: 3173
Experience:  IRS licensed Enrolled Agent and tax instructor
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I settled a contractual dispute between my company and the

Customer Question

I settled a contractual dispute between my company and the Federal government in 2012 paying a substantial amount of money from my own pocket. The CPA who prepared my individual tax report (I don't have the company anymore) indicated that the amount to settle was tax deductible and prepared the 2012 individual tax report including this deduction. IRS is saying that the money paid was not allowable. Can you provide a third opinion?
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

What was the dispute about?

Expert:  emc011075 replied 1 year ago.

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.

Customer: replied 1 year ago.
Was a contract with Kelly Air Force Base in San Antonio, Tx in 1997. The base was closed and they terminated my contract. They sued me and my company to recover funds advanced (around $70K) my corporate attorney at the time negotiated a repayment plan in installments. By 2012/3, I still owned around $12K to pay off so I decided to pay off and close the case. By that time the IRS had audited my 2012 tax report. I hired a CPA (former officer of the IRS) who found out that I had not deducted the amount I paid to the government so he modified the report. IRS is not willing to pay after all these years
Expert:  emc011075 replied 1 year ago.

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.

Expert:  emc011075 replied 1 year ago.

Did you take a deduction for the entire repayment in 2012?

Customer: replied 1 year ago.
I think I was not clear. The advance money they paid was to pay for the manufacturing of the equipment (third party), they did not want to start the mfg process with out advance payment. When they canceled the contract we lost the advance payment since we had to pay to mfg (Ingersoll Rand). The advance that we pay to vendor was lost after the mfg stop working.(custom made large mechanical component)
The repayment money to the Government was never deducted on my individual tax report for the years between 1997-2011.
On 2012 we sent a check for about $12K to the Department of Justice to settle the case all together.
After the 2012 audit we contacted this CPA who found out that the money (the $12K) should have been deducted, I even asked what happened with the previous years monthly installment payment, he said that because the time passed it wouldn't be right to go back to amend all the previous tax reports but the last payment had to be deducted.
Expert:  emc011075 replied 1 year ago.

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.

Expert:  emc011075 replied 1 year ago.

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.

Expert:  emc011075 replied 1 year ago.

Any questions? Is there anything else I can help you with today?

Customer: replied 1 year ago.
I have been talking with everyone in the Houston office, they even appointed an advocate.
Basically they bankrupt my company and forced me to go to work as an engineer for someone
Since I don't have the CPA who prepared the amendment would you or someone you know take the
I recently lost my job after the collapse of the oil price and have some financial limitations but the IRS
owns me for the two years audited (2011-12) around $20K
Expert:  emc011075 replied 1 year ago.

Have you tried taxpayer advocate services?

Expert:  emc011075 replied 1 year ago.

They can be very helpful in disputes with the IRS:

Customer: replied 1 year ago.
I spoke to them today (to the supervisor of the advocate). She said that the money I paid was not allowable to deduct. I asked if she was a CPA, she said no but she had been doing this for a long time.
Expert:  emc011075 replied 1 year ago.

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: or check your state board of accountancy to find CPA who specializes in IRS disputes. Some of them may be both, CPAs and EAs.

Customer: replied 1 year ago.
OK Thanks for your help