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All taxpayers, whether individuals or not, may deduct as business expenses the costs relating to tax matters that are ordinary and necessary in the conduct of their trade or business under Section 162 of the Internal Revenue Code. However, certain non-business expenses are also deductible under Section 212, "Expenses for production of income." Notwithstanding the somewhat limiting title of Section 212, subsection (3) currently permits a deduction for non-business expenses that can have nothing to do with the production of income, namely expenses paid or incurred "in connection with the determination, collection or refund of any tax."
Because of subsection 212(3), many taxpayers are able to deduct their expenditures for a broad range of tax services, regardless of whether the taxes in question were incurred in the course of a trade or business, for investment purposes or for personal reasons. For example, the legal costs arising in resolving asserted tax deficiencies are deductible, including litigating expenses. See e.g., Rev. Rul. 92-29, 1992-1 CB 20. The same holds true even in the defense of criminal tax cases See e.g. Commissioner v. Shapiro, 278 F. 2d 556 (7th Cir. 1960).
A provision in the recently released House tax bill (H. R. 1) that has not received a lot of attention but could significantly impact many taxpayers is Section 1307, entitled “Repeal of Deduction for Tax Preparation Expenses.” The proposed change is broader than the title implies because it repeals Code subsection 212(3) in its entirety, effective January 1, 2018.
If the proposed repeal of subsection 212(3) is enacted into law, the fees taxpayers pay for these services will likely have to be treated in the same manner as as legal fees in general, which are not deductible when incurred for personal reasons. See, United States v. Gilmore, 372 U.S. 39 (1963). Therefore, cash basis taxpayers may have additional incentive to pay their non-business tax-related fees before year-end or risk losing a deduction to which they are presently entitled.
Philip Karter specializes in tax controversy and tax litigation matters. In his 38-year career, Mr. Karter has litigated Federal tax cases in the United States District Courts, the United States Tax Court and the United States Court ...