Most readers of this forum know that if a taxpayer goes to court with the IRS after exhausting all other remedies and prevails, it is possible for the taxpayer to recover legal fees from the Service. What I want to know is whether it is possible to recover the costs of defending yourself at an audit if you prevail?
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Sch A
Perhaps fees paid to a representative could be deducted as "tax prep fees" on Sch A? I'm sure you cannot deduct the "opportunity costs" of defending yourself. -
For an ordinary taxpayer audit short answer is no.Comment
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I would suggest you read Reg §301.7430-2. Requirements and procedures for recovery of reasonable administrative costs. It gives many details It is possible to collect costs but quite difficult. You must show the position of the IRS was not substantially justified. Not too easy.
Here's a snip from a Court case (citations omitted) where the taxpayer filed a petition with the Tax Court (See TC Rule 270) AFTER the taxpayer was denied the costs by the IRS. The Tax Court only has jurisdiction to hear your case after the IRS denies your claim. Note - in an audit there is a very good chance the IRS had a reasonable basis to look at a return.
A. Substantial Justification The Commissioner's position is substantially justified if, on the basis of all of the facts and circumstances and the legal precedents relating to the case, the Commissioner acted reasonably. .... In other words, to be substantially justified, the Commissioner's position must have a reasonable basis in both law and fact. ... A position is substantially justified if the position is “justified to a degree that could satisfy a reasonable person”. ...Thus, the Commissioner's position may be incorrect but nevertheless be substantially justified "`if a reasonable person could think it correct'.”Comment
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Get extended service plan or audit insurance
One way to get around the financial injury from an ordinary audit, even if it is a no change audit, is to invest in an Extended Service Plan, inaccurately called "audit insurance" by some, issued by the professional who prepares your taxes. That extended service plan can provide that there will be NO CHARGE, if certain conditions are met, for representation and assistance in the event of an ordinary audit. In my opinion, such a plan is a good deal for all concerned.Comment
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A Statement and A Question
The statement is that the return in question did clearly have a substantial omission of income. The reason it ended with the IRS paying money is that the return in question also left off substantial deductions, What I am hearing is that the IRS probably had substantial authority for their position. (See I think every audit where they can be shown to be due one penny less than they ask for should cost them substantially more than they asked for- say 100K times. But what I think about that and what the Revenue Agents think about the rules are both irrelevant. What matters is the rules as they are.)
Where can I go to arrange this audit insurance for my clients?Comment
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That one wasn't any no change audit
Since you noted that there was a goodly amount of income not reported on the tax return, the audit was not any no change audit, not even if the same amount or more of additional deductions were proven at the audit. You question remains a good question for those returns which are audited, and for which no changes are found.Comment
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ij
but where do I go to buy audit insurance for my customers?Comment
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provide audit insurance
Erchess could provide the audit insurance himself;
i.e. if the client elects to pay Erchess an upfront premium of $XX, then he promises that if the IRS or the state examine the return, he will--subject to certain conditions--offer audit representation and assistance without additional charge to his client.Comment
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Insurance
Like Otis said, a preparer can self-insure with a contract/engagement letter between himself and his client. He can contact his liability insurance company &/or others to see what he can purchase commercially. If he has a franchise, he probably has or has an option to obtain this type of product through the franchisor company, The DIY crowd has options for coverage, so before you try to represent one of them see if they have free help available to them.Comment
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