When taxpayers in Phoenix take improper tax deductions, it can lead to significant consequences from both the IRS and the Arizona Department of Revenue. These can range from financial penalties to criminal prosecution, depending on whether the improper deduction was a result of a good-faith mistake or intentional fraud.
Our tax resolution attorneys can review your tax returns and financial records to differentiate between a simple error or a more serious issue that could trigger higher penalties. We can advise whether it is best to file an amended return, contest an IRS notice, or prepare for an audit, all the while guiding you towards the best resolution.
What Are Examples of Improper Tax Deductions?
Improper tax deductions that people in Phoenix often take will typically fall into the categories of expenses that are not directly and ordinarily related to earning your income or operating your business:
- Personal living expenses: This includes rent or utilities for your primary residence (unless it qualifies for the specific home office deduction), personal cell phone use, and the cost of personal grooming or clothing that isn’t a required uniform for a specific job.
- Commuting costs: The cost of traveling from your home to your primary place of work is considered a personal commuting expense and is not deductible. However, work-related travel between job sites during the business day can be deducted.
- Fines and penalties: Expenses such as parking tickets, court-ordered fines, or penalties imposed by a governmental authority for violations of the law are not deductible.
- Political contributions: Donations made to political campaigns, parties, or candidates are not considered deductible charitable contributions.
- Excessive business gifts: There are specific caps on the amount that can be deducted for business gifts given to clients or partners, and attempting to deduct an amount over the IRS-specified limit is improper.
- Non-deductible education expenses: Generally, educational expenses are not deductible if they are for new job skills or a new profession, rather than maintaining or improving existing skills required for your current job.
- Large asset purchases: Claiming the entire cost of a long-term asset as a one-time expense instead of depreciating its value over time.
- Home office deductions: Over-claiming the square footage used for a business or deducting costs that aren’t eligible, like the entire rent or mortgage interest.
If you have been audited or are facing a tax dispute, Dayes Law Firm can represent you and work towards a favorable resolution.
Taxpayer Rights and Resolving Improper Deduction Tax Controversies
When dealing with a tax controversy related to an improper deduction in Phoenix, taxpayers have rights including the right to challenge the IRS’s position, appeal to an independent forum, and retain representation. The IRS will begin by sending a formal notice by mail, outlining the areas of your tax return being reviewed and requesting specific documentation to support your claimed deductions. This is the point at which you should contact an attorney to review your potential legal options.
You must provide the requested records, such as receipts, invoices, or other evidence, by the deadline to substantiate your deductions. For correspondence audits, this is done by mail, but for office or field audits, you will meet with an IRS representative. An attorney can represent you in all interactions with the IRS including the various types of audits. If the IRS disallows an improper tax deduction after an audit, you could owe additional taxes, penalties, and interest.
The IRS can impose penalties for improper deductions, such as the negligence penalty (typically 20% of the underpayment). However, you can request penalty relief in some cases, such as when you have a good compliance history.
Appealing Audit Findings for Improper Tax Deductions
If you wish to contest the audit findings, you can file a written protest to request a conference with the IRS Independent Office of Appeals. This is an internal, independent office that aims to resolve tax disputes without litigation. The IRS also offers mediation as an alternative way to resolve disputes. If you cannot reach an agreement with the Appeals Office, you may take your case to court.
The U.S. Tax Court is a common venue for tax litigation and does not require you to pay the disputed tax beforehand. Other options include U.S. District Court and U.S. Court of Federal Claims, which typically require payment of the disputed tax before filing.
Our Phoenix attorneys can provide tailored legal advice on complex tax matters, and help you understand the specific rules and regulations that apply to improper tax deductions. We can assist in correcting errors on past tax returns, ensuring compliance and avoiding potential penalties. This may include amending a return or a more comprehensive audit defense in an appeal or courtroom setting.
Contact Our Phoenix Attorneys for Help Addressing Improper Tax Deductions
If the IRS has already assessed additional taxes or penalties stemming from alleged improper tax deductions, our Phoenix attorneys can often negotiate to settle the debt for a lower amount or help you secure a manageable payment plan.
If you acted with good faith when the improper deductions were made, we can often request the IRS to remove or reduce penalties, which could significantly lower your total tax debt. A tax attorney can provide advice on proper tax reporting and documentation practices to help you or your business avoid similar issues in the future. Request your free case consultation from Dayes Law Firm today.
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