Legal espesnes Sch C Audit

[Bucky]

Okay 2010 return being audited for legal expenses, repairs and business expenses. Sch C contractor. In 2010 he was showing $9100 legal expenses. Because of amount when I questioned he said it was from a four year law suite over prints and he was finely released. These were the attorney fees he said he paid. Now because of audit I find these were not paid in cash. He did remodeling work on a property the attorney owned and they called it even. He paid for all supplies and a little outside labor plus his own labor. Supplies equal about $4500. How is the IRS going to look at this. And no I didn't verify back then if if sent attorney 1099 and no he didn't.

[taxxcpa]

This would be barter income and expense.

The amount he reported as barter expense should equal the barter income the lawyer reported.

If he has any billings from the lawyer, that could help.

He may need to show evidence to support the cost of materials and outside labor. He cannot count the "cost" of his own labor, of course.

[Kram BergGold]

Barter

In a barter situation like this, your client has to report as income the value that his work produced for the lawyer and then if what he got in return was a 100% business expense then he has an offsetting deduction. I will venture to guess that your client did not report the income for his services. In the audit you will be asked by the IRS if your client had barter income. You will need to answer yes and deal with this mess. Be prepared for the IRS to then examine all open returns for this barter issue.

[veritas]

What do you want to bet

The attorney didn't report the transaction?

Hope the agent takes a little peek at the attorney.

[taxea]

he should have a billing from the atty for his work, a billing to the atty for the work he did in exchange and a receipt from the atty that indicates that the original bill was paid in full by way of "services rendered" by your client. Or an affidavit from the atty that verifies your client's explanation. And yes your client needed to show the value of the work he did as income. If he has no way of proving his explanation he may be out of luck and unless he can show that a portion or all of the legal fees were for business expense or retention of income he will be looking at penalties and interest on the 9100.